Residents of Indiana often have many different reasons for filing a petition with the federal Bankruptcy Court, but one of the most common motivating factors is the incessant rain of phone calls and letters from debt collectors. Filing a bankruptcy petition can provide immediate relief from such harassment by means of the “automatic stay.” The automatic stay is an order that is issued by the bankruptcy court where the petition is filed.
The basics of the automatic stay
The automatic stay is often the one factor that convinces a person burdened by unmanageable debt to file a bankruptcy petition. The debtor is required to submit a list of the names, addresses and telephone numbers of creditors as an attachment to the bankruptcy petition. The clerk of bankruptcy court then uses this information to prepare and serve the automatic stay.
A stay is a court order that is intended to stop a judicial proceeding. In bankruptcy court, the stay affects all collection activity against the debtor that was proceeding as of the date of filing of the petition. The purpose of the stay is to preserve the debtor’s assets so that they can be collected and used to satisfy the petitioner’s debts without prejudicing one creditor against another.
What is “stayed” by the automatic stay
The stay halts all proceedings against the debtor that had been or could have been commenced before the filing of the petition. The stay also halts all efforts to enter or enforce judgments against the debtor or the property of the bankruptcy estate. Perhaps the broadest provision of the automatic stay is its power to halt any act “to collect, assess, or recover a claim against the debtor that arose before the commencement of the case.”
Exceptions to the automatic stay
Some claims against the debtor are not affected by the automatic stay. These exceptions include proceedings before the United States Tax Court, civil actions to establish paternity, proceedings to issue or modify an order for domestic support obligations and proceedings to modify an order for child custody. Actions to foreclose on a delinquent mortgage are subject to the automatic stay, but the stay does not affect the underlying debt obligation.
Penalty for violating the automatic stay. A creditor that proceeds with a collection action that is subject to the automatic stay faces the possibility of a fine or being held in contempt of court. Creditors can ask the court to lift the stay, but they cannot proceed to collect on a debt without the court’s permission.
The effect of the automatic stay in some cases can be a complex legal issue. Anyone considering filing a bankruptcy petition should consult an experienced bankruptcy lawyer on the effect of the automatic stay.