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FAQ'S

 How Does Bankruptcy Stop Your Creditors?

1. How does filing for bankruptcy stop my creditors?

After you file for bankruptcy, the automatic stay offers you strong legal protection against your bill collectors. When you file for bankruptcy the automatic stay immediately stops any lawsuit that was filed against you.  Moreover, all collection calls must also stop. If you are at risk of being evicted, being foreclosed on, being found in contempt for failure to pay child support, or losing such basic resources as utility services, welfare, unemployment benefits, or your job because of a wage garnishment, then the automatic stay may provide a powerful incentive to file for bankruptcy. The purpose of the automatic stay is to give debtors a “breathing space” from their creditors, and a break from the financial hell that drove them to file for bankruptcy.

2. What type of protection does the automatic stay provide to a debtor?

Here is how the automatic stay affects some common emergencies:

a. Utility disconnections. If you are behind on your utility bills and the company is threatening to disconnect your water, electric, gas, or telephone service, then the automatic stay will prevent the disconnection for at least 20 days. Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff in the winter may be justification enough.

b. Foreclosure. If your home mortgage is being foreclosed on, then the automatic stay temporarily stops it. However, your bank will often be able to proceed with the foreclosure case sooner or later. If you are facing foreclosure, then a chapter 13 bankruptcy is usually the better choice than a chapter 7, if you want to keep your house.

c. Eviction. If you are being evicted from your home, then the automatic stay may provide you with some help. However,the new bankruptcy law makes it much easier for landlords to continue with evictions. If your landlord already has obtained a judgment of possession against you when you file, then the automatic stay won’t affect these eviction proceedings.

d. Collection of over payments of public benefits. In some cases a debtor is may have been overpaid unemployment or social security benefits. If you receive public benefits and if you were overpaid, normally the agency is entitled to collect the overpayment out of your future checks. The automatic stay prevents these collection actions. However, if you become ineligible for benefits, then automatic stay doesn’t prevent the agency from denying or terminating benefits for that reason.

e. Multiple wage garnishments. Filing for bankruptcy also stops wage garnishment immediately. Thereafter, not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy. In New Jersey no more than 10% of your wages may be taken to garnished to pay off any court judgments.

f. Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does stop the IRS from issuing a tax lien or seizing your property or income.

g. Paternity Cases. A lawsuit that is filed against you seeking to establish paternity or to establish, modify, or collect child support or alimony isn’t stopped by your filing for bankruptcy.

h. Criminal proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component won’t be stopped by the automatic stay. For example, if you were convicted of writing a bad check, and then sentenced to community service, and ordered to pay a fine, then your legal obligation to do community service won’t be stopped by your filing for bankruptcy.

i. Loans from a pension. Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions and IRA’s).

j. Multiple filings. If you had a bankruptcy case pending during the previous year, then the stay will automatically terminate after 30 days unless you, the trustee, the U.S. Trustee, or a creditor asks for the stay to continue and proves that the current case was filed in good faith. If a creditor has filed a motion to lift the stay pending during the previous case, then the court will presume that you acted in bad faith, and you will have to overcome this presumption to get the protection of the stay in your current case.

3. How can my creditors find a way around the automatic stay?

Usually, a creditor can get around the automatic stay by requesting that the bankruptcy court to remove or “lift” the stay. This type of request is commonly referred to as obtaining stay relief. For example, if a debtor files for bankruptcy the day before his house is to be sold in foreclosure. Moreover, the debtor has no equity in the house, and he can’t pay your mortgage arrears, and there is no way of keeping the property. The foreclosing creditor often will apply to bankruptcy court soon after you file for bankruptcy and request for permission to continue with the foreclosure process. In many scenarios such as this, the application for stay relief will be granted.

4. Does the automatic stay stop the collection of credit card debts and medical bills?

Yes, any creditor who tries to collect on credit card debts, medical debts, debts arising from breach of contract, or legal judgments against you must stop collection activities after you file your bankruptcy case. Thereafter, your creditors can’t:

a. File a lawsuit or proceed with a pending lawsuitagainst you;

b. Record liens against your property;

c. Report the debt to a credit reporting bureau; or

d. Seize your property or income, such as money in a bank account or your paycheck.

5. In what type of cases does is automatic stay useless?

The stay does not stop to every type of collection action, nor does it apply in every situation. There are certain debts or legal cases that are sufficiently important to overcome the automatic stay. In these situations collection actions can continue just as if you had never filed for bankruptcy.

a. Divorce and Child Support

The automatic stay does not divorce and child support cases. Almost all proceedings related to divorce or parenting continue as before-they are not affected by the
automatic stay. These include actions to:

• set and collect current child support and alimony

• collect back child support and alimony from property that is not in the bankruptcy estate

• determine child custody and visitation

• establish paternity in a lawsuit

• modify child support and alimony

• protect a spouse or child from domestic violence

• withhold income to collect child support

• report overdue support to credit bureaus

• intercept tax refunds to pay back child support, and

• withhold, suspend, or restrict drivers’ and professional licenses as leverage to collect child
support.

b. Tax Proceedings

The IRS can continue certain actions, such as conducting, a tax audit, issuing a tax deficiency notice, demanding a tax return, issuing a tax assessment, or demanding payment of an assessment.

c. Pension Loans

The stay doesn’t prevent withholding from a debtor’s income to repay a loan from an ERISA-qualified pension (this includes most job-related pensions or individual retirement plans).

6. How can a debtor lose the legal protections  of the automatic stay?

Even in circumstances where the stay would otherwise apply, you can lose its protection through your own actions. The stay won’t protect you from collection efforts if:

a. you had a previous bankruptcy case pending within a year of your current bankruptcy filing, or

b. you don’t meet the deadlines for dealing with property that serves as collateral for a secured debt.

7. Can I file multiple bankruptcy cases and still receive the protection of the automatic stay?

Under the new bankruptcy law, the automatic stay will last only 30 days if you had a prior bankruptcy case pending within the year before you file, unless you can obtain a court order to extend it.

8. Does the automatic stay stop an eviction case?

In the past, many people filed for chapter 7 to stop the sheriff from enforcing a judgment for possession or an eviction order. While landlords could come into court and ask the judge to lift the automatic stay and let the eviction proceed, many landlords didn’t know they had this right-and many others didn’t have the wherewithal to hire attorneys. In other words, filing for chapter 7 often stops court-ordered evictions from continuing for the duration of the bankruptcy (typically, four to six months).

In today’s world  the law is quite different. The new bankruptcy law gives landlords the right to immediately evict a tenant, despite the automatic stay if:

• the landlord got a judgment for possession before he tenant filed for bankruptcy (if the judgment as for nonpayment of rent, there is a possible exception to this rule, discussed below), or

• the landlord is evicting the tenant for endangering he property or the illegal use of controlled substances on the property.

If the landlord does not already have a judgment at the time you file, and if he wants to evict you, then the automatic stay will prevent the landlord from beginning or continuing with eviction case. However, the landlord can always request the court to lift the stay, and many times these requests are granted.