Bankruptcy Automatic Stay

Section 362 of the United States Bankruptcy code, (11 U.S.C. 362(a) of this section) allows for what is called "automatic stay". Automatic stay starts from the moment a bankruptcy petition is filed at the bankruptcy court. Automatic stay works like a protective cloak around the debtor as, once they have declared bankruptcy, no creditor may continue to pursue the debtor for any sort of payment, repossession or wage garnishment.

Even if a creditor has no knowledge of the bankruptcy, any contact with the debtor in this context is regarded as a violation of the stay and may be subject to a fine and or legal costs (if a car has been repossessed and has to be returned on the orders of the bankruptcy court judge for example).

A filing of a petition and the subsequent automatic stay prevents creditors from doing the following:

1. No judicial proceedings may be started, nor may any already in process be continued.

2. No further action may be taken by any creditor to obtain any property of the estate of the debtor.

3. No action may be taken to create, perfect or enforce a lien against the property of the debtor.

4. Setting off any indebtedness that was owed to the debtor before the bankruptcy petition was filed.

However, news of a bankruptcy does not always travel as fast as one might like. Here are three points to consider protecting the property of the estate after the bankruptcy petition is filed.

1. Automatic stay halts any foreclosure that may be imminent. Therefore, any debtor in this situation when they file for bankruptcy should take a copy of their petition to the foreclosure sale and make the officials aware that bankruptcy has been filed, and that the sale cannot proceed.

2. If there are any parties currently pursuing the debtor through the bankruptcy courts, send a copy of the petition to every court from where the proceedings are taking place.

3. Anti discrimination laws prevent any employer from taking action against any employee for filing bankruptcy. Anyone who has filed bankruptcy and whose wages are being garnished should inform their employer so that no more cash is deducted from their pay check.

As in all things in life, little is ever set in stone, and there are exceptions to automatic stay. These are:

1. If the debtor as committed a crime, automatic stay will not prevent the full force of the law being meted out to them. In other words, you can still go to jail!

2. If the debtor has any property obtained by a loan or leased, and the agreements have not been reaffirmed within 30 days of the 341 meeting, automatic stay is not applicable.

3. Eviction. If a landlord has been successful in obtaining an eviction order before the bankruptcy petition was filed, can continue the proceedings. In addition, if it can be shown that the tenant has been using illegal substances in the property, or is a risk to the property, ("endangerment"), proceedings may be taken to evict the tenant after they have filed bankruptcy, automatic stay does not apply.

4. Any payments for a loan taken out against a retirement plan can still be deducted from the debtor's pay check.

5. Support orders, child support and alimony, are not covered by automatic stay.

6. Divorce proceedings are unaffected by automatic stay, unless property is being divided up.

7. Proceedings to identify if the debtor is the father of a child.

As a side note, if one fails to pay a fine as a result of a car accident, the state often suspends one's driving license. This is to encourage one to pay the fine. Automatic stay remains in effect and the driving license cannot be suspended. However, if one files for bankruptcy after the license is suspended, one cannot recover one's license until the bankruptcy is discharged.

As far as co-signed loans are concerned, whilst automatic stay will prevent any creditor coming after the debtor filing for bankruptcy, the creditor can still pursue the co-signees. A way around this is for the debtor to file chapter 13 bankruptcy and including the co-signed debt in its entirety. This is called a "co debtor stay," and will protect all signatories to the loan.

Prior bankruptcy can also have an effect on automatic stay. There are basically three scenarios, and all are the result of having a previous bankruptcy dismissed, (but not for failing the means test).

1. If a prior bankruptcy has been dismissed less than a year before filing a new petition, automatic stay comes into force when the new case is filed, but lasts only 30 days. It is down to the debtor to persuade the court that the stay should remain in effect after this time.

2. If more than one bankruptcy has been dismissed in the year before filing again, the automatic stay does not come into force unless and until the debtor files a special request to the court to impose it.

3. If a bankruptcy has been dismissed due to an order of the court being deliberately disobeyed, or a dismissal was requested within 180 days, no stay goes into effect when bankruptcy is filed.

Some creditors, mortgage companies for example, can get around automatic stay by asking the court for relief from the stay. For example, if a homeowner is behind on the mortgage repayments, has no equity in the property, has no income and therefore is obviously unable to retain the property, the court may grant the mortgage company relief from the automatic stay as the case appears hopeless and foreclosure inevitable, so automatic stay is lifted.