When you file bankruptcy, the court issues an order called an automatic stay that instantly stops most types of collection action.
How the automatic stay stops creditors is one of the greatest benefits of filing bankruptcy, especially for debtors who face imminent eviction, foreclosure, repossession, or wage garnishment.
For these debtors, an emergency bankruptcy filing may be necessary to protect property from immediate creditor collection. An emergency bankruptcy petition is a basic or skeleton petition that can be filed quickly to obtain protection of the stay in circumstances when it might not be possible to complete an entire petition.
The key is that the debt was incurred prior to the date of the petition. In some circumstances, this can even block future collection of debts not yet known.
One example might be an act of negligence that occurred prior to the date of the petition. Even if no lawsuit was filed at the time the bankruptcy was filed, this potential liability might be discharged in a bankruptcy and subject to the stay.
Unfortunately, despite its broad benefits, the stay does not stop all types of collection action and, in some situations, only provides temporary relief.
What the Stay Will Not Stop
Because certain types of debt cannot be discharged in bankruptcy, collection of these non-dischargeable debts may not be affected by the automatic stay.
The most common examples include child support, spousal maintenance (called alimony in other jurisdictions), criminal fines or restitution, and certain loans from pensions or IRAs.
These debts still can be collected through lawsuit or wage garnishment even after filing bankruptcy.
If you have tax debt, the IRS may still issue an assessment and demand for payment, but filing bankruptcy may stop the IRS from placing a tax lien on your home or seizing money from your bank account or wages even though tax debt is not always dischargeable through bankruptcy.
Motion to Lift the Automatic Stay
Creditors otherwise prevented from taking collection action under the stay can file a motion in the bankruptcy court to request permission to resume collection activity.
The likelihood of this type of motion practice may depend on the character of the debt and the type of bankruptcy filed.
For example, a debtor who faces foreclosure and files chapter 7 bankruptcy might expect their mortgage lender to request the stay be lifted if it is clear the debtor cannot cure the delinquent mortgage payments and there is no equity in the property that can be used to pay other creditors.
Conversely, filing chapter 13 bankruptcy can enable debtors to cure delinquent mortgage payments and other types of debt over time through the bankruptcy plan.
Landlords commonly ask to lift the stay when it is clear that the tenant cannot pay delinquent rent. If the bankruptcy court grants the request, the eviction can proceed.
When any creditor files a motion to lift the stay or other kind of motion, the debtor is given an opportunity to file a response and oppose the creditor’s request.
When you are interviewing bankruptcy attorneys, be sure to discuss possible litigation. Most attorneys charge additional fees beyond the cost of the administrative case, usually at an hourly rate, to litigate.
The good news is that bankruptcy litigation is pretty uncommon for most filers. We have helped hundreds of debtors successfully obtain discharge without any litigation (or extra costs to our clients).