How the Automatic Say Can Help You

Are financial difficulties looming over your head and you’re considering filing for bankruptcy? You’ve probably heard of the term “automatic stay,” but what exactly does it mean? Let’s talk about the concept of the automatic stay and explain its significance during bankruptcy proceedings.

Understanding the purpose of the automatic stay

When you file for bankruptcy, an automatic stay is put into effect immediately. Essentially, this is a legal restriction that stops most creditors from taking any further action to collect debts from you. The automatic stay is a fundamental piece of the bankruptcy process, providing you with breathing room and protection from aggressive debt collectors. The automatic stay is codified in §362(a) of the Bankruptcy Code and is one of the most crucial protections provided by the Code. In re Enron Corp., 306 B.R. 465, 475 (Bankr. SDNY 2004).

The fundamental purpose of the automatic stay is to give debtors a chance to regroup and reorganize their finances without the constant pressure of debt collection efforts. It aims to provide a temporary shield, allowing individuals and businesses to focus on finding a resolution to their financial situation. With the automatic stay in place, you can take a step back, assess your options, and work towards a fresh start. Hudson Valley Cablevision Corp. v. Route 202 Developers, Inc., 170 B.R. 798, 532 (SDNY 1994).

How the automatic stay works in a bankruptcy case

The automatic stay prohibits creditors from initiating or continuing any legal actions against you, such as wage garnishment, repossessions, foreclosure proceedings, or harassing phone calls.  It gives you a temporary break from the stress of debt collection, allowing you to focus on resolving your financial circumstances. The automatic stay prevents any act that would negatively affect the property of the estate. 11 U.S.C. § 362(a).

The automatic stay is triggered as soon as your bankruptcy petition is filed with the court. Section 362(a) of the Bankruptcy Code applies to all entities including persons, estates, trusts, and governmental units. 11 U.S.C. § 101(15). This means that even if a creditor is not listed in your bankruptcy schedules, they are still bound by the automatic stay once they receive notice of your case.

It’s important to note that the automatic stay does not discharge your debts or eliminate your obligations. It simply provides a temporary pause in debt collection efforts, allowing you to work with the bankruptcy court and your creditors to find a resolution. In re Koolik v. Markowitz, 40 F.3d 567, 568 (2d Cir. 1994 ).

Exceptions to the automatic stay

While the automatic stay provides significant protection, it’s important to understand that there are exceptions to its coverage. Section 362(b) of the Bankruptcy Code lists 28 exclusions and exceptions to the automatic stay. 11 U.S.C. §362(b).  Certain debts, such criminal proceedings can commence and continue without the automatic stay provision being violated. 11 U.S.C. § 362(b)(l); In re United States v. Colasuonno, 697 F.3d 164, 173 (2d Cir. 2012). The automatic stay does not prevent child custody, visitation rights, and domestic violence proceedings from continuing. 11 U.S.C. § 362(b)(2). These obligations remain enforceable during and after bankruptcy.

Additionally, creditors can petition the court to lift the automatic stay under specified circumstances. For example, if you have multiple bankruptcy filings within a short period of time, a creditor may argue that the automatic stay should be lifted to allow them to pursue their collection efforts. Similarly, if you have pledged collateral for a debt, such as a car loan or a mortgage, the creditor may request relief from the automatic stay to initiate foreclosure or repossession proceedings if you are not making adequate protection payments post-filing.

In such cases, the bankruptcy court will weigh the creditor’s request against your need for the automatic stay. The court will consider factors such as the nature of the debt, the likelihood of successful reorganization, and the potential harm to both the debtor and the creditor. Ultimately, the court’s decision will be based on what is deemed in the best interest of all parties involved.

Common misconceptions about the automatic stay

There are many misconceptions surrounding the automatic stay that can lead to confusion and unnecessary stress. One common misconception is that the automatic stay eliminates all debts and provides a clean slate. In reality, the automatic stay is only a temporary measure that gives you time to address your debts through bankruptcy proceedings. It does not erase your obligations or guarantee that all your debts will be discharged.

Another misconception is that the automatic stay applies indefinitely until your bankruptcy case is resolved. While it is true that the automatic stay remains in effect throughout the bankruptcy process, it does have limitations. In some cases, the automatic stay may be lifted or modified if the court deems it appropriate. It’s important to consult with your bankruptcy attorney to understand the specific limitations and duration of the automatic stay in your situation.

The impact of the automatic stay on creditors

While the automatic stay provides debtors with much-needed relief, it also has implications for creditors. When the automatic stay is in effect, creditors are prohibited from taking any action to collect debts without the bankruptcy court’s approval. This can be frustrating for creditors who may feel that their ability to recover their money is being hindered.

However, it’s important to remember that the automatic stay is designed to strike a check and balance system between the interests of debtors and creditors. It allows debtors to work towards a resolution while ensuring that creditors have an opportunity to present their case before the court. Creditors can seek relief from the automatic stay if they can demonstrate that they are being unfairly prejudiced or that their rights are being violated.

How to enforce the automatic stay

If you believe that a creditor is violating the automatic stay, it’s important to take action to protect your rights. Notify your bankruptcy attorney immediately and provide them with all relevant information regarding the violation. Your attorney can then take the necessary steps to enforce the automatic stay and seek appropriate remedies on your behalf.

It’s worth noting that the consequences for creditors who knowingly violate the automatic stay can be severe. The bankruptcy court has the power to impose sanctions, including fines and damages, against creditors who engage in prohibited debt collection activities during the automatic stay. These penalties are meant to deter creditors from disregarding the automatic stay and to ensure that debtors are afforded the protections they are entitled to. In re Best Payphones, No. 01-15472, 2002 Bankr. LEXIS 1939, at *14 (Bankr. S.D.N.Y June 24, 2002). A violation is punishable as contempt of court, and the violating party may be sanctioned. Ball v. A.O. Smith Corp., 321B.R.100, 109 (N.D.N.Y 2005).

Challenges and limitations of the automatic stay

While the automatic stay provides valuable protection, it’s not without its challenges and limitations. One of the main challenges is that the automatic stay does not prevent secured creditors from repossessing or foreclosing on collateral if you are behind on payments. If you wish to keep your property, such as a car or a home, you will need to continue making payments or negotiate with the creditor to modify the terms of the loan. The following are the three grounds for obtaining relief: (1) for cause; (2) when the debtor does not have equity in property and such property is unnecessary for an effective reorganization; or (3) when the property is “singe asset real estate.” 11 U.S.C. §§ 362(d), 101(51B). The word “cause” is not defined in the Bankruptcy Code. In re B.G. Petroleum, LLC, 525 B.R. 260, 278 (Bankr. W.D. Pa. 2015). Thus, courts consider three factors in order to determine whether relief should be granted for cause: (1) the likelihood the debtor will endure prejudice; (2) the probability the party will succeed on the merits; and (3) the weighing of hardships among the parties. Id.

Additionally, the automatic stay may not be applicable to certain types of bankruptcy cases, such as repeat filings within a short period of time.  11 U.S.C. §§ 362(b)(21), 109(g), 362(c)(3) and 362(d)(4).  In such cases, the automatic stay may be limited in duration or not granted at all. It’s important to consult with a bankruptcy attorney to understand the specific limitations and potential challenges related to the automatic stay in your situation.

The automatic stay and foreclosure

One of the most common concerns for individuals facing financial difficulties is the potential loss of their home through foreclosure. The automatic stay can provide temporary relief from foreclosure proceedings, allowing you some time to explore alternatives and potentially save your home. In re LaBarge v. Vierkant, 240 B.R. 317, 322 (B.A.P. 8th Cir. 1999).

When the automatic stay is in effect, foreclosure actions are halted, meaning that the foreclosure process cannot move forward. This can provide you with an opportunity to negotiate with your mortgage lender, explore loan modification options, or consider other alternatives, such as a short sale or a deed in lieu of foreclosure.

However, it’s important to note that the automatic stay is not a permanent solution to foreclosure. If you wish to keep your home, you will need to work with your attorney and the mortgage lender to find a resolution that is acceptable to both parties. This may involve making arrangements to catch up on missed payments, modifying the terms of your loan, or pursuing other foreclosure prevention options.

Conclusion: The importance of the automatic stay in bankruptcy cases

In conclusion, the automatic stay is a vital aspect of the bankruptcy process that provides debtors with much-needed protection and relief from debt collection efforts. It gives you a temporary respite from the stress of debt collection, allowing you to focus on resolving your financial situation.

While the automatic stay has limitations and challenges, it plays a crucial role in giving individuals and businesses the opportunity to reorganise and work towards a fresh start. It provides a level playing field for debtors and creditors, ensuring that both parties have a chance to present their case before the bankruptcy court.

If you’re considering filing for bankruptcy, it’s important to consult with a qualified bankruptcy attorney who can guide you through the process and help you understand the implications of the automatic stay in your specific situation. Remember, knowledge is power, and understanding the automatic stay is key to navigating the bankruptcy process with confidence.