Stops All Collection Action Against Debtor
All collection activity against the debtor or the debtor’s property must cease immediately upon the debtor filing the Petition For Bankruptcy. The Automatic Stay protects the debtor during the bankruptcy proceedings so that the debtor’s case can be resolved without interference from acts of collection.
Bankruptcy Code Section 362
Under Bankruptcy Code Section 362, the court issues an Automatic Stay upon the court filing of the debtor’s bankruptcy petition with the court. It goes into immediate effect against all creditors of the debtor, whether secured or unsecured. The automatic stay also covers creditors engaged in any form of collection activity whatsoever against the debtor or debtors’ property.
Examples of Collection Activities That Get Stayed
The collection activities subject to the Automatic Stay include property and home foreclosure proceedings, all creditor lawsuits, wage garnishment, bank liens, repossessions, and any written or verbal communication to the debtor by a creditor.
The intended purpose of the automatic stay is to immediately halt all collection actions and communication between a collector or creditor who tries to communicate with the debtor after the automatic stay goes into effect.
Creditor Can Be Sued For Failing To Obey The Court’s Stay Order
Those creditors and collection agencies that violate the automatic stay can be sued. The debtor is subject to contempt charges if it is found the creditor knowingly violated the automatic stay.
Length of Stay – Exceptions To Stay
The automatic stay generally lasts until the debtor receives the court’s final discharge of debts.
Situations in which the Automatic Stay does not apply include:
- Child and spousal support
- Divorce proceedings
- The collection of non-dischargeable taxes
Creditors Petition For Relief From Stay
Suppose a creditor, upon showing good cause, petitions the bankruptcy court for Relief of the Automatic Stay. In that case, the bankruptcy court may, upon setting a hearing date, modify the stay order to allow the creditor to resume collection of the collateral. However, the creditor must show “good cause” in seeking relief.
A common example of “good cause” is when the creditor can prove that the collateral used to secure the debt with the debtor is rapidly losing value.
One example is the debtor’s purchase of a new vehicle in which the debtor only put down three percent of the vehicle’s purchase price. The bank’s collateral on the car loan is the vehicle itself, which due to market forces, will rapidly decline in resale value the longer the debtor keeps possessing the vehicle.
