One of the most powerful provisions in the bankruptcy code is the automatic stay. Prior to declaring for bankruptcy, creditors or collection agencies will continually contact the debtor until the balances are collected. Besides collection letters in the mail and non-stop harassing phone calls, secured creditors are able repossesses automobiles and finalize the foreclosure of real property. Likewise, a judgment creditor can garnish up to 25% of net wages from each paycheck, levy bank accounts which freezes the assets until the debts are paid, and even order that a sheriff collect the daily proceeds from a store front if the debtor is a business owner.
Once a bankruptcy has been filed, there is a powerful all encompassing injunction called an automatic stay. This is a provision that is afforded to the debtor which stops all actions by creditors under penalty of legal action. Even the taxing agencies such as the Franchise Tax Board and the Internal Revenue Service must stop. This stay becomes a permanent stay after the debt is discharged by the bankruptcy court, which is why it is so necessary to list all debts and assets in the bankruptcy petition. Otherwise, once the process is over, the debts that have not been discharged can still be collected by creditors.
The automatic stay stops all collection calls, letters, garnishments, levies, and all foreclosure actions even if the case is filed just minutes from the foreclosure sale. Under Chapter 13, a debtor is even able to recover an automobile that has been repossessed as long as the bankruptcy is filed prior to the auction of the car, which occurs two weeks after the car is repossessed.
There are of course certain debts that are not affected by the automatic stay. Domestic support creditors such as child support and alimony. Evictions, but only if the landlord got a court to approve the eviction (called a judgment for possession) before the tenant filed for bankruptcy. Lastly, criminal cases will proceed in spite of a bankruptcy filing.
Finally, a creditor can petition the court for relief from the automatic stay if the debt involves a secured asset such as car or house payment and the debtor has failed to make monthly payments, failed to abide by their Chapter 13 plan of reorganization, or and property has no equity under a Chapter 7 liquidation. The stay can also be limited in its effect if multiple bankruptcies are filed within a twelve month period. A second case in twelve months receives only a 30 day stay, and no automatic stay is afforded in a third case in twelve months. Competent counsel of course can file a motion to extended the automatic stay under Chapter 13 in these circumstances but only if good cause can be shown as to why the case will be successful this time around.