Many people in Indiana are driven into bankruptcy by one factor: repeated collection activity by creditors. Some creditors can be reasonable in dealing with people who owe them money, but many can be rude, relentless and disrespectful. The federal Bankruptcy Code has a provision that shields debtors from many of the disreputable actions of creditors, from threats to lawsuits. The provision is called the “automatic stay.”
What is the automatic stay?
A stay is an order by a court that prevents certain parties from taking the actions described in the order. Courts use stay orders to preserve the status quo until certain issues are resolved. The automatic stay in bankruptcy is issued automatically upon the filing of a petition for bankruptcy under either Chapter 7 or Chapter 13. When the debtor files the bankruptcy petition, the clerk of the bankruptcy court where the petition is filed issues an order to all creditors of the debtor forbidding them from pursuing any collection activities against the debtor. The parties named in the order are “stayed” from pursuing litigation, sending demand letters, garnishing the debtor’s wages and taking any other action to collect the debt.
Purpose of the stay
The automatic stay is intended to protect the debtor from creditors during the entirety of the bankruptcy proceeding. The stay is also intended to guarantee that all creditors are treated fairly during the bankruptcy proceeding by preventing one or a group of creditors from taking aggressive collection action against the debtor.
Benefits of the automatic stay
In individual bankruptcy under either Chapter 7 or Chapter 13, the automatic stay brings instant relief from the collection activities of all of the debtor’s creditors. In particular, it can stop a lawsuit to foreclose a mortgage until the bankruptcy proceeding is complete. The automatic stay does not affect the validity of the underlying debt or any security agreements that involve any of the debtor’s assets, but it can buy valuable time for the debtor to negotiate with creditors and rearrange his debts.
Anyone considering bankruptcy may wish to consult an experienced bankruptcy attorney about the automatic stay and whether it may help restore the person’s financial health.