What to know about the automatic stay in bankruptcy

On Behalf of | Feb 14, 2022 | Bankruptcy

Bankruptcy is a legal process that can help consumers in Austin, Texas, get certain debts discharged though liquidation or repayment. Falling behind on debt usually means getting calls from creditors; if the consumer gets calls from creditors, the automatic stay in bankruptcy helps them.

Overview of the automatic stay

The automatic stay is a provision under Section 362 in all bankruptcy chapters that prohibits creditors from temporarily collecting debt. If a consumer is involved in litigation with the creditor or the creditor garnishes wages, these actions are halted. It also helps creditors get equal treatment, giving them a fair chance at seizing assets and receiving a proportionate share.

The automatic stay becomes active as soon as the consumer files the bankruptcy petition and ends at discharge. However, consumers who file one case in a year with a pending case only get the protection of the automatic stay for 30 days. Consumers who have two or more pending cases commonly do not get the protection of the automatic stay.

When creditors challenge the stay

There are some circumstances in which a creditor may file a motion to lift the automatic stay and continue collection actions. These circumstances often occur with secured debts, such as a mortgage in default under Chapter 7.

A creditor may take action if the consumer doesn’t own the property or thinks the value will decrease during proceedings. Unsecured creditors seldom file a motion to lift the automatic stay in Chapter 7 cases since discharge commonly happens within six months. The motion to lift commonly gives the filer 14 days to respond, or it is granted by default.

The automatic stay doesn’t apply to all debts, such as domestic obligations and debt from criminal proceedings. A consumer can pursue legal action against creditors who don’t follow the automatic stay. Filing bankruptcy provides relief, but because bankruptcy stays on a credit report for several years, a consumer should study their options before pursuing this type of debt relief.