The People’s Lawyer

What is the automatic stay and how can it help debtors?

On Behalf of | May 17, 2023 | Bankruptcy

The automatic stay is a fundamental component of the bankruptcy process that provides immediate relief for debtors upon filing for bankruptcy. It is an automatic injunction that goes into effect as soon as the bankruptcy petition is filed, imposing a legal barrier against most creditor collection efforts. 

Generally speaking, someone who files for bankruptcy can expect to be relieved of most wage garnishments, bank levies, demands for repayment and legal actions right after they file a bankruptcy petition as a result of the automatic stay. 

Purpose and scope

The automatic stay serves multiple purposes, including:

  • Halting Creditor Actions: The primary function of the automatic stay is to freeze most creditor actions against a filer. This means that creditors are prohibited from pursuing or continuing any collection efforts, such as lawsuits, wage garnishments, repossession of assets, foreclosure proceedings or harassing phone calls or letters.
  • Ensuring the Fair Distribution of Assets: The automatic stay ensures that all creditors are treated equally and have an opportunity to participate in the bankruptcy process. It prevents individual creditors from taking advantage of the debtor’s limited resources and helps promote an orderly and fair distribution of available assets among the creditors.

While the automatic stay provides broad protection, there are certain exceptions and limitations to its scope. These include:

  • Some Legal Actions: The automatic stay may not apply to certain legal proceedings, such as criminal actions, divorce and child support proceedings or certain tax-related activities. These actions may proceed independently of the bankruptcy case.
  • Secured Creditor Actions: Secured creditors, such as mortgage lenders or vehicle lien holders, may have the ability to seek relief from the automatic stay to enforce their rights to retake collateral. They may petition the bankruptcy court to lift the stay or modify its terms.
  • Multiple Filings: If the debtor has had one or more previous bankruptcy cases dismissed within a specified time period, the automatic stay may be limited or even eliminated altogether.

Understanding the automatic stay is crucial for debtors who are contemplating or undergoing bankruptcy. Seeking legal guidance to gain clarity about its protections and limitations can be helpful.