One of the important underlying policies of the United States Bankruptcy Code is that all creditors of the bankrupt debtor must be treated equally. A second important principal is to protect the bankrupt estate from being reduced by aggressive collection efforts by one or two creditors. Both policies are accomplished in part by what is called the “automatic stay.” This post will explain the basics of the automatic stay.
What is an automatic stay?
A stay is a court order that commands the parties who are subject to the court’s jurisdiction to refrain from a specified action. In the bankruptcy court, the stay, with a few exceptions, applies to all pending claims of all creditors of the debtor. The important aspect of the automatic stay is the fact that the stay issues automatically upon the filing of a bankruptcy petition. The debtor who files the petition must submit a list of all creditors and the amounts owed to them. The clerk of court then uses this list to serve a copy of the automatic stay order on each creditor.
What is the effect of the stay?
As long as the stay is in force, no creditor can begin or pursue any court action to collect a debt owed by the debtor, garnish wages or make telephone calls demanding payment. The duration of the stay may vary from case to case depending upon the status of each debt. The automatic stay will temporarily stop an action to foreclose a residential mortgage. Unfortunately, the underlying debt and the obligation to repay the loan are not affected. Most mortgage loans are either renegotiated or reaffirmed by the debtor.
Limits on the automatic stay
Some debts are not affected by the automatic stay. Among these are child and spousal support obligations and tax debts.
Whether to file or not?
The protection provided by the automatic stay is a tempting reason for filing a bankruptcy petition. Nevertheless, no two situations are the same. Anyone considering bankruptcy should consult an experienced bankruptcy attorney for advice on the effect of the automatic stay and the overall impact of a bankruptcy proceeding.