The Automatic Stay in Bankruptcy

The Automatic Stay in Bankruptcy – How the Automatic Stay Stops Creditors from Calling and Taking Actions such as Wage Garnishment and Foreclosure

When a person files for bankruptcy, the filing itself triggers what is known as the “Automatic Stay.”  The Automatic Stay means that most creditors and courts that have notice of the bankruptcy must immediately cease all collection efforts against the person who filed for bankruptcy (the Debtor).

As a result, creditors (including collection agencies) can no longer call you, send collection notices, or take any other action from and after they have notice of the bankruptcy filing.  Instead, their only recourse is through the bankruptcy process.  If they initiate collection efforts after they have notice, they may be subject to strict penalties.  As a result, in the bankruptcy petition, it is important to list all creditors and their current addresses.

How Does a Bankruptcy Filing Affect Wage Garnishment?

Generally wage garnishment starts with a lawsuit where a Creditor (a person to whom money is owed) sues a Debtor (the person owning money).   If the Debtor fails to appear at the hearing or loses at the hearing, the court enters a judgment order, saying that the Debtor owes the Creditor a certain amount of money.  If the Debtor doesn’t pay the money voluntarily, then the Creditor can ask the court to set another hearing to issue a Garnishment Order that can take up to 25% of the Debtor’s paycheck after deductions.[1]

Generally when a Debtor files for bankruptcy, creating an Automatic Stay, and sends a proper notice of the bankruptcy to a garnishing Court, then the court must stop the wage garnishment.

Automatic Stay and Foreclosure

Generally when a Debtor whose house is in foreclosure proceedings sends proper notice of bankruptcy to the foreclosure court and the creditor mortgage company, then the court must put the foreclosure proceedings on hold and the mortgage company must stop all collection efforts. This means that unless the house has already been sold at a foreclosure sale, the mortgage company must cancel any scheduled foreclosure sale and other collection efforts until the Bankruptcy is complete or until the court grants the mortgage company relief from the Automatic Stay.

In a Chapter 7 bankruptcy, the Automatic Stay only postpones foreclosure for a matter of months, but this may give the debtor time to find a new place to live or obtain a mortgage modification to stop the foreclosure.  In a Chapter 13 bankruptcy, the Automatic Stay can last for 3-5 years, while debtor catches up on their mortgage payments to stop the foreclosure altogether.

[1] The Automatic Stay does not stop income withholding orders to pay child support, as child support receives special treatment in bankruptcy.