By: chris skinner January 22, 2025

A Closer Look at the Automatic Stay in Bankruptcy

What Collection Activity is Prohibited?

The bankruptcy code aims to put creditors on a level playing field. If one creditor could jump in and collect on a debt, then they would receive more than they are entitled to under the bankruptcy code. Invariably, creditors will end up taking a “haircut”—meaning, they won’t get 100% of what they are owed at the end of the bankruptcy process. The stay keeps one from jumping the line and trying to get more than their fair share.

To that end, the automatic stay prevents certain common collection activity:

Foreclosure
Wage garnishment
Filing a lawsuit
Continuing a lawsuit or any other court proceeding
Creating, perfecting, or enforcing a lien
Repossessing collateral (such asrepossessing a car)

The stay is broad. It covers any “act” taken in furtherance of collecting on a debt. It can even apply to making a phone call or sending collection letters.

Of course, some creditors might not know you have filed for bankruptcy. The court will send them a notice, but it could take a day or two for notification to arrive. Nonetheless, any collection activity which starts or continues after you file is stayed.

What Collection Activity is Excluded

Not all litigation or other collection activity is prevented. For example, here some situations where the stay doesn’t apply:

Criminal trials. The stay doesn’t prevent the government from bringing a criminal prosecution against the debtor. For example, the state of California can continue to prosecute you for assault or theft.
Certain family law actions, such as divorce, paternity, child support, child custody, or domestic violence.
Collection of domestic support payments. The stay won’t stop the state from enforcing a child support order, for example.
Interception of a tax refund. The state can intercept your refund to pay child support arrears, as an example.

What Happens if a Creditor Violates the Stay?

Creditors might violate the stay accidentally or intentionally. A key consideration is knowledge.

For example, you might file for bankruptcy on a Monday, and on Tuesday morning a creditor files a lawsuit to collect on an unpaid debt. The creditor hasn’t received notice of the bankruptcy filing. However, you can certainly notify the court, which should stay the proceedings because federal bankruptcy law is superior over state law.

Other violations are intentional or willful. The creditor knows an automatic stay is in effect but they don’t care. They go ahead with collection activity, such as repossessing your car or sending collection notices to your home. You should share with your attorney any collection activity because it violates the stay.

Under Section 362(k), a debtor can seek attorneys’ fees, actual damages, and possibly punitive damages for willful violations. Other sanctions can include contempt of court. Some debtors have received compensation for pain and suffering or emotional distress damages when their creditor calls them at work or shares information about the debt with other people.

There is really no excuse for an intentional violation of the automatic stay. Sophisticated banks and collection agencies should know their obligations under the law.

How Long Does the Automatic Stay Last?

The stay should last for the duration of your bankruptcy case. If you file for Chapter 7 protection, then it will last until your case is discharged, which might only be a few months. A Chapter 13 bankruptcy takes 3-5 years, so the stay will be in effect for longer.

However, issues sometimes arise if you have a Chapter 13 and you incur debt after you file your bankruptcy petition. A creditor might try to bring collection activity for this post-petition debt.

Can A Creditor Lift the Automatic Stay?

Sometimes, creditors can get a bankruptcy judge to “lift” the stay. Unlike the exceptions discussed above, a judge will consider other situations on a case-by-case basis. The bankruptcy code says a court may grant relief from the automatic stay “for cause”—but what does that mean?

One situation involves a creditor who wants to foreclose on collateral. If the collateral has no equity, then the trustee won’t raise any money in a sale, so a judge can give the green light for the creditor to foreclose.

For example, your car might only be worth $10,000 but the car loan is for $11,000. In this case, the trustee can’t raise any money to give to creditors by selling the car. A judge will probably give the lender permission to repossess the car.

Another situation involves litigation which will not affect the bankruptcy. A landlord-tenant dispute is a common situation. A landlord might want to evict a tenant for nonpayment of rent. The automatic stay will prevent them, but a judge might lift the stay to allow eviction proceedings to start up or continue.

Call Resolve Law Firm. We have years of experience in bankruptcy law. A creditor who wants the stay lifted needs to file a motion with the bankruptcy court, and a judge shouldn’t just rubber stamp the request.

Obtain Peace of Mind Today

The automatic stay allows debtors to breathe a sigh of relief as their case winds its way through the court system. No creditor or collection agency should send you notices or call you at home. They also shouldn’t garnish wages or continue with a breach of contract lawsuit. Contact our office to discuss if bankruptcy is the right option.