If your wages are garnished to pay a debt, facing legal proceedings from creditors, or are getting frequent calls and letters from debt collectors, the stress can be overwhelming. If you are considering filing for Chapter 7 bankruptcy, this may be the best solution as it not only eliminates most debts, it places an automatic stay on nearly all types of debt collection. To help you better understand what this means for you, we’re sharing what an automatic stay is and how it works.
Before we look at what an automatic stay in Chapter 7 is, let’s look at exactly what Chapter 7 bankruptcy is and whether it’s right for you.
Chapter 7 allows you to liquidate most types of unsecured debt so that it is eliminated and discharged from your records.
First, your bankruptcy filing is accepted and all attempts to collect a debt will cease (referred to as an automatic stay, which we will cover in more detail below). Then a judge will assign a trustee to your bankruptcy case who will collect your nonexempt assets, such as stocks or a secondary vehicle, and sell them to pay off as much money owed as possible.
Unlike Chapter 13, you’re not facing a debt repayment plan or debt management plan; instead, most unsecured debts are discharged, so you have a clean slate.
To file for Chapter 7, bankruptcy law requires you to undergo a credit counseling class and meet a means test. Specifically, you must have an income under the median income for your state for your family size. The bankruptcy court will also look at your disposable income after the cost of housing, food, and necessities to determine eligibility.
An automatic stay means that most debt collection efforts must stop immediately after your bankruptcy filing. Specifically, this means that wage garnishment, collection letters, and legal proceedings must cease or the creditor can face legal action.
However, the creditors must be informed of your bankruptcy filing, so your lawyer or the bankruptcy court mails notice of the automatic stay going into place to eliminate nearly all types of debt collection and communication.
If a lawsuit has been filed against you, your lawyer will file a suggestion of bankruptcy to inform the court and all parties that the lawsuit cannot proceed until the stay is lifted. The provisions of the automatic stay are codified in 11 U.S.C. section 362.
In most instances, the automatic stay protections will remain in place until your case is closed. A creditor seeking to continue collection efforts involving you or your property will have to file a motion with the bankruptcy court seeking permission to lift the automatic stay. The creditor is required to notify you and the judge will decide whether to grant or deny the request.
There are situations involving repeat bankruptcy filers where the automatic stay is limited to 30 days unless extended, where the automatic stay is not automatic and a request to impose the automatic stay must be granted before the automatic stay comes into effect, or when the automatic is not available for at least two or more years. These are out of the ordinary circumstances that your bankruptcy lawyer will discuss with you based on the particulars of your case.
As soon as the automatic stay goes into effect, the majority of debt collection from both unsecured and secured creditors will cease, including:
If a debt collector, such as a credit card company, is seeking a legal judgment against you, all court proceedings stop as the debt becomes a part of your bankruptcy case.
If your gas, water, or electricity is in danger of being disconnected due to missed payments, filing bankruptcy keeps your utilities on.
While this doesn’t discharge the debt because your account is still active, it does give you a few weeks or months to catch up on your payments. This is often much easier when you are not facing wage garnishment or attempting to pay other debts.
If you are behind on your mortgage and facing foreclosure, your bankruptcy case places a pause on these proceedings. During this time, you may be able to catch up on your payments, or it buys you time to find a new place to live if you can’t.
However, because your mortgage lender is a secured creditor, the bankruptcy judge may allow the proceedings to continue or the lender can re-file and start the foreclosure process again.
Once your bankruptcy case is finalized and the foreclosure process restarts or begins, the mortgage debt is eliminated and you do not have to pay on it. This is referred to as an in rem proceeding where the lender can go after the property but not you personally.
Eviction works in a similar way to home foreclosure proceedings and secured debts. The automatic stay means that the eviction process will pause during your bankruptcy case unless the landlord obtained a judgment of possession before you filed bankruptcy.
However, if you owe rent for previous months and don’t catch up during this time, the eviction process will continue after your case is finalized. The bankruptcy court may also allow the landlord to continue the eviction during the bankruptcy case if it is found that you have broken your lease in other ways, such as by damaging property or engaging in illegal activities.
If you have a car loan, the lender is also a secured creditor with a lien on the title. Thus, your bankruptcy case places an automatic stay on the repossession if you are behind on payments, but the lender can either repossess the vehicle after your Chapter 7 bankruptcy is finalized or can file to repossess before the case is finalized. However, this does provide you some time to either create an arrangement with the lender or choose voluntary repossession of the car.
If an unsecured creditor, such as a credit card company or collection agency for medical bills, has already received a judgment against you in civil court, they may be garnishing your wages.
According to bankruptcy laws, an automatic stay requires immediate cessation of a wage garnishment, so you will see an immediate increase in your bring-home pay. This allows many people to catch up on rent or utilities and avoid eviction or utility disconnection after their bankruptcy case is completed.
While your automatic stay prevents creditors from harassing you or attempting to recover property, there are certain debts that the automatic stay doesn’t protect you from.
You are still required to maintain your child support payments during your bankruptcy case. If your wages are being garnished, the automatic stay does not stop this method of collection.
If you owe alimony payments, you are still required to pay them.
While bankruptcy law does allow some old tax liabilities to be discharged, an automatic stay doesn’t stop an existing tax audit from going through. If you are found to owe taxes during this time, you will be required to pay them or future tax returns may be garnished.
If you are struggling to pay debts and wage garnishment or collection efforts are causing significant stress, we can help you move forward.
Our bankruptcy law firm has the experience and knowledge necessary to handle your bankruptcy case and provide comprehensive services, including the required credit counseling to help you reduce your costs and save you time. To learn more about your options and get a free bankruptcy evaluation, reach out to us today at 954-807-1562 or fill out our form below to get started.
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