During times of financial hardship, filing for Chapter 7 or Chapter 13 Bankruptcy is a great option that can help provide relief and assist in the road to recovery. Upon filing the initial Bankruptcy Petition with the Court, you will immediately begin receiving assistance through the process. During this time, the Automatic Stay is enacted. The Automatic Stay is a part of the Bankruptcy Code and works to prevent creditors from taking further actions against you. Once active, creditors cannot attempt to collect on any outstanding debts throughout a Bankruptcy Case, allowing you to have the opportunity to recover and rebuild. If creditors fail to follow the guidelines of the Automatic Stay and continue trying to collect or reach out to you, their actions are not considered valid and do not need to be collected on.
WHAT IS PROTECTED WITH THE AUTOMATIC STAY?
The Automatic Stay is meant to provide you with protection during your Bankruptcy Case. Creditors will take many actions to attempt to collect on outstanding debts. This includes constant phone calls that can be tiresome and annoying. Thanks to the Automatic Stay, creditors are prohibited from reaching out to debtors and insisting they pay their debts off instantly. In addition, creditors are no longer able to file any new lawsuits against debtors or establish new liens on their property. This includes preventing a wage garnishment or bank accounts from being levied. Without the Automatic Stay, creditors may request the Court issue an Earnings Withholding Order (i.e. wage garnishment) or levy your bank accounts in order to make up for the lack of payments. By obtaining a judgment from the Court, creditors would gain access to funds without requiring the debtor’s permission to do so.
If the decision is made for a wage garnishment, the Court will order for your employer to hold a portion of your paycheck and transfer the amount directly to the creditor through a levying officer. Your employer will receive an Earnings Withholding Order, along with several other documents, which notifies him/her that the creditor has obtained a judgment from the Court to garnish your wages. Employers will begin withholding wages beginning on the first payment period after the 10th day of he/she receives the order. Employers will continue withholding wages until the outstanding amount has been paid off or the Court orders them to stop. States determine a set limit for the amount that creditors can take from your wages. In California, the law prevents creditors from taking more than 25% of a debtor's paycheck or the amount of your weekly disposable income that exceeds the state minimum wage by 40%. By using the Earnings Withholding Calculator for Employers, you can estimate how much of your weekly earnings may be garnished. The garnishment limit is whichever yields a lesser amount.
While a bank levy also requires creditors to obtain a judgment from the Court before taking action, it differs from a wage garnishment. Instead of garnishing a portion of your paycheck, a bank levy allows creditors to withdraw money directly from your bank account. By filing for Bankruptcy, the Automatic Stay prevents creditors from taking these actions against you, allowing yourself more opportunities to recover.
In addition, the Automatic Stay can also prevent actions taken against your property, including the following:
UTILITY ACCOUNTS BEING DISCONNECTED
If you have fallen behind on utility payments, such as water or electricity, utility companies may shut off your services in response. With the Auto. Stay, utility companies cannot disconnect services for at a minimum of 20 days, providing you with some extra time to clear outstanding debts before facing any disruptions.
HOUSE BEING FORECLOSED ON
Once the Bankruptcy Petition has been filed with the Bankruptcy Court, mortgage companies or other institutions that hold your mortgage are unable to foreclose on your property if payments are not paid due to the Auto. Stay. The extent of relief provided by the Auto. Stay varies depending on which chapter you file. If filing Chapter 7, foreclosure can only be halted temporarily due to the liquidation process. On the other hand, Chapter 13 gives you more time to avoid foreclosure altogether through your developed repayment plan.
BEING EVICTED FROM A RESIDENCE
If you do not own the home that you currently reside in and rent the property from somebody else, you are likely required to make monthly rent payments directly to the landlord. If you fail to pay your rent, your landlord may choose to evict you from the property. When filing for Bankruptcy, the Automatic Stay delays the eviction process. However, this varies depending on whether or not you had already begun your Bankruptcy filing when your landlord received a judgment for the property. If you have already filed for Bankruptcy and your landlord obtains a judgment, the Stay will prevent the eviction from occurring. On the other hand, if your landlord has already obtained a judgment before your filing, the Auto. Stay will only be placed if you file Official Form 101A and can provide proof of a deposit within the first 30 days after your filing. Once the initial 30 days have passed, the Auto. Stay may go away. If you wish to continue receiving protection from the Stay and prevent being evicted, you must pay your landlord the outstanding balance.
LIMITATIONS OF THE AUTOMATIC STAY
While the Automatic Stay can be beneficial to you in many ways during the duration of your Bankruptcy case, it is only able to protect to an extent. 11 U.S.C. § 362(b) provides an extensive list of exceptions to the stay that we discussed. This includes the following:
- Collection attempts on debts incurred AFTER filing for Bankruptcy
- Criminal Actions
- 401(k)/Pension Loans
- Tax-related actions such as taxing authorities seeking tax audits, issuing a deficiency notice, sending notices that certain tax returns need to be filed, and making assessments on taxes.
- Divorce proceedings and alimony collection
- Child support, custody, and establishing paternity
- Multiple Bankruptcy Filings
- If the person filing was in 1 prior Bankruptcy case within 12 months of another case, by 11 U.S.C. 362(a) the Automatic Stay will no longer be in place on the 30th day after the most recent case has been filed. 11 U.S.C. § 362(c)(3)(A)
- If the Debtor was in 2 prior Bankruptcy cases within 12 months of another case, by 11 U.S.C. 362(a) the Automatic Stay will not be in effect once the most recent case has been filed. 11 U.S.C. § 362(c)(4)(A)
- With both circumstances, the debtor still has the option to file a Motion in their later case in which they request the Court extend the Automatic Stay past the 30-day limit (11 U.S.C. 362(c)(3)(B)) or have the Stay imposed (11 U.S.C. § 362(c)(4)(B)).
HOW LONG WILL I CONTINUE RECEIVING PROTECTION UNDER THE AUTOMATIC STAY?
The Automatic Stay remains active throughout the entirety of a Bankruptcy case. In other words, until a case has been dismissed, closed, or discharged, you will continue receiving protection from the Automatic Stay. However, in some situations, creditors may attempt to prevent the Automatic Stay from taking action. By filing a Motion for Relief From the Automatic Stay, the Court may grant the motion to dismiss the Automatic Stay within 30 days. Once done, the Court cannot reestablish the Automatic Stay. For example, if the Court does not feel you are in a position to be able to keep the property, they may choose to lift the Stay. If there are multiple creditors involved in your case, the Automatic Stay will only be lifted for the filing creditor. For example, if your mortgage company files the motion, and the Court grants it, they will be able to garnish your wages. However, if you also have an outstanding balance towards your landlord, and he/she has not chosen to take action, the Automatic Stay will still be intact to prevent you from facing an eviction.
There are some ways to ensure that you are utilizing the Automatic Stay to your biggest advantage. During this time, it is important to maintain any insurance you might have. By doing so, you can ensure the protection of your home or vehicle. Most importantly, it is crucial that you do not wait to file for relief. As previously mentioned, if you choose to wait until certain legal actions have been taken against you, the Stay may fail to provide the protection that it potentially could have. If you are hoping to receive protection under the Automatic Stay or would like to learn more about how it could benefit you, contact us today to speak directly with an attorney.
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