If you’re researching the term automatic stay, you are probably thinking about declaring bankruptcy.
But on a positive note, an automatic stay gives people in a bankruptcy a lot of relief from debt problems, right at the time they most need it. We’ll explain.
What Is an Automatic Stay?
An automatic stay is a federal injunction that temporarily prevents creditors, collection agencies, government departments and anyone else from collecting, or even contacting and requesting, money that a debtor owes them.
How an Automatic Stay Works
You have to file for bankruptcy, as you probably guessed. Once the paperwork has been filed, the automatic stay is, well, automatic.
“Once a bankruptcy is filed, the automatic stay takes effect immediately,” says Michael Cibik, an attorney with Cibik & Cataldo PC in Philadelphia, who says he has helped more than 15,000 clients file for bankruptcy over the past 40 years.
“That stops all attempted collection activity against the debtor. For example, lawsuits, garnishments, foreclosures, sheriff sales, repossessions and convictions,” he says.
If debt collectors continue to contact you, let them know that you are declaring bankruptcy and have an automatic stay in place. They may not know. If they keep coming after you, as collection agencies are well aware, they could be fined.
That said, you could find yourself in hot water if you declare bankruptcy after an eviction notice, says Adrienne Hines, a bankruptcy attorney in Port Clinton, Ohio.
“If you file for bankruptcy before an eviction notice is issued, the court will immediately establish an automatic stay,” she says. “However, since 2005, if you file bankruptcy after an eviction notice, a landlord can opt to ignore the stay. You can still fight it, though. Some states like Ohio will allow you to stay if you bring your rent payments up to date.”
What Is Not Included in an Automatic Stay?
Most debts are halted, but there are a few exceptions:
- Child support.
- Alimony, also known as spousal support.
- Money that a court says you owe.
How Long Does an Automatic Stay Last?
Generally, an automatic stay lasts until you go to bankruptcy court and your case is closed. There are exceptions, though. If you file bankruptcy more than once in a year, an automatic stay will only last 30 days.
If you wind up filing three times in a year – which isn’t possible with a Chapter 7 but is with a Chapter 13 bankruptcy – there will be no automatic stay unless you can convince the bankruptcy court that you aren’t a serial bankruptcy filer.
Another helpful thing to remember: While an automatic stay usually lasts until you go to bankruptcy court, a creditor can seek to terminate the stay by seeking permission from the bankruptcy court, says Matthew Zimmelman, a bankruptcy attorney in Valley Stream, New York.
“This is typically granted in a Chapter 7 if payments are not being made on a vehicle or house,” Zimmelman says.
Because, yes, if you’re going to keep your house or car, you should try to keep making payments – or if you’re really struggling, perhaps negotiate to make partial payments.
You might as well. Whether you file Chapter 7 or Chapter 13, you’ll eventually have to pay money toward the car and house at some point.
“Bankruptcy does not result in a free house or car,” Zimmelman says.
Examples of Automatic Stay
If you’re still a little unclear on how an automatic stay might apply to your situation, here are some example scenarios when an automatic stay might be applied.
- You learn that your house is going to be foreclosed. But you declare bankruptcy, and the automatic stay kicks in. For the time being, until your case goes to a bankruptcy judge, you won’t have to worry about your house being sold at auction. But if something like this situation happens, talk to a bankruptcy attorney. Your home is on the line. This isn’t the time to wing it and try some DIY legal maneuvers.
- You learn that you’re going to be evicted from your apartment. As noted earlier, if you get an eviction notice, an automatic stay may not protect you from being evicted. If you sense that an eviction notice is coming, and you’ve been thinking of declaring bankruptcy, it’s better to file sooner rather than too late.
- Your car is being repossessed. Not any more. That is, if you file for bankruptcy, and your car is in danger of being repossessed, an automatic stay means that it won’t be. If it was recently repossessed, you may now be able to get it back. But, again, if you want to keep the car, you should try to continue making payments on it in the meantime.
- Credit card companies are coming after you. Does the phone never stop ringing? Maybe you are being sued by your credit card company (or former credit card issuer), or maybe several of them. An automatic stay stops all of that. The letters should stop coming, and the phone should definitely stop ringing. The lawsuits will generally stop, too, and go away, provided you get everything worked out in bankruptcy court.
Does an Automatic Stay Hurt Your Credit Score?
Of course. The automatic stay itself may not have any actual bearing on your credit score, but the bankruptcy will. That’s always a big black mark in the credit bureaus’ eyes.
That said, Cibik says most of the credit reports about your bankruptcy are “meaningless.” He explains: “After the debtor files and is discharged of debt, most creditors are looking at their income and length of employment for creditworthiness.”
That’s not to say you’re going to have a great credit score. You won’t. But now that you have your debts, or the worst of them, behind you, you may find that you can get a loan easier than you could before you declared bankruptcy.
Nothing in this process is pretty, and bankruptcy can be very stressful. But it all begins with that injunction to essentially freeze time so you can work with the courts to figure out which debts you can pay, and which you can’t, and which debts, if any, will be discharged. In other words, an automatic stay allows you to go forward with your life.