When you file your bankruptcy, your creditors are required by federal law to stop contacting you and stop harassing you. Something called an automatic stay takes effect the moment your bankruptcy is filed, and it does prevent your creditors from contacting you in any way in an attempt to collect the debts.
Dealing with creditors is perhaps the most stressful part of any family’s financial difficulties. Though the law is designed to limit the ability for creditors to harass you, many will push the limits of the law. And even when they follow the law, talking about your debt with a creditor can dredge up all the anxiety and fear you have about your situation. Rarely does a conversation with a creditor leave you feeling any better about your situation. It is often this unpleasant contact with creditors than drives many people to consider bankruptcy in the first place.
One of the good things that happens when you file bankruptcy is the relief you can get from creditors and their calls. When you file bankruptcy, your creditors are required by federal law to stop contacting you and stop harassing you. Something called an automatic stay takes effect the moment your bankruptcy is filed, and it does prevent your creditors from contacting you in any way in an attempt to collect the debts.
The stay is a bankruptcy version of a “pause” button, allowing the court and trustee time to catalog the debts and assets. Once the court has the lay of the land, they can decide the priority (which creditor gets paid, from first to last) and how much of the debt they will receive from you – all, some or none.
However, the stay does not apply to all types of creditors. Tax liens often are exempt from a stay. Depending on when a tax becomes delinquent or whether or not the lien will be discharged in bankruptcy. Property taxes and income taxes are the most common culprits. Outstanding alimony and child support payments are another type of debt not usually discharged directly through bankruptcy. So an ex-spouse can still sue you after your bankruptcy (or even during) despite the automatic stay.
Also, creditors can ask (motion) the court to remove the stay. Courts sometime grant the petition. Secured creditors are those who hold a collateral interest in something of value such as a car or a home. These creditors have a better chance of winning their motion to remove the stay if it seems like you will have to surrender your collateral in the bankruptcy. Creditor commonly ask for this motion a lot in foreclosure cases, especially if you are behind in payments. But any creditor can ask to lift the stay. And if the court agrees with the creditor and you cannot argue a valid and legal defense, then the court can order the stay removed for that creditor.
All in all, the automatic stay is a useful tool in a bankruptcy, even if is temporary in nature. Understanding all the implications and exceptions is an important part of the bankruptcy puzzle. Having an idea of how the court will rule on each debt you have is like finding the corner pieces. Knowing who might challenge the automatic stay and how to defend against it are like some of the edges. And though the stay is one of the most attractive benefits in the bankruptcy process to most people in debt, it is just one step towards the final goal of resetting your life.