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Automatic Stay in Bankruptcy and Creditor Obligations

automatic stay chapter 7

Dealing with Chapter 7 bankruptcy is already a delicate and complicated process. On top of that, creditors are constantly trying to get your money and take advantage of you. Sometimes, it seems like there’s no end in sight. But what if we told you that there is a solution? All those calls, messages, and notes in the mail will cease in the blink of an eye. Luckily, the Bankruptcy Code’s automatic stay stops all creditors and collection activity in its tracks.

For almost twenty years, O’Bryan Law Offices has been providing bankruptcy assistance to thousands of people a year. If you are losing sleep at night worrying over your bills and have considered filing for bankruptcy due to recent financial hardships, we’re here for you. Know there is an answer, and we can tailor a solution specifically to fit your individual needs. To schedule a free consultation with an experienced Louisville bankruptcy attorney, call our office at 502-339-0222 today.

What is an Automatic Stay in Chapter 7?

The automatic stay prohibits most creditors from continuing with their collection activities, which provides welcome relief to debtors. It also offers the opportunity to regroup during bankruptcy. There are some exceptions to the automatic stay, so it’s important that, before you file for Chapter 7 or 13, that you learn about these exceptions. A creditor can ask the court if they’re able to lift this automatic stay through a motion, but there is still no guarantee that their request will be granted. Unless they have a good cause, the chances are small. This is because any tampering would weaken what little protection the debtors have.

Automatic Stay Chapter 7:

When you file Chapter 7, your assets are part of the bankruptcy estate. The court appointed trustee that handles cases in this category will liquidate them and distribute the proceeds to creditors proportionately as best they can. This is under an automatic stay order which prevents foreclosure or other seizure by creditors while there’s still equity for distribution.

Below, we list the circumstances under which the automatic stay benefits you as well:

  • You have an opportunity to arrange for other housing or work out a loan with the lender.
  • If the trustee sells your property, you might be compensated for a portion of the proceeds. After paying off any mortgages or other liens, they must reimburse you your homestead exemption amount before paying off any creditors at all. You have access to excess funds if enough money exists after selling it to pay back your creditors.

How Long is the Automatic Stay in Chapter 7 Bankruptcy?

The length of an automatic stay depends on whether the collection activity is against the debtor or their property. When the collection efforts are against the debtor, the stay usually lasts until that debtor receives a bankruptcy discharge. Then, creditors have the right to resume their collection efforts on all debts that were not discharged. Permanent discharge injunctions cover all debts that are discharged.

Even after filing for bankruptcy, however, creditors may receive payments or take hold of the collateral. When you file for bankruptcy, you must provide a Statement of Intention. This document tells both your creditors and the court that you will surrender the property, redeem your collateral, or reaffirm the debt. If you intend to keep your property, you must either redeem or reaffirm within 30 days of filing the case. Those who fail to file see their automatic stay lifted on day 31. Then, the creditors have the right to proceed with car repossession or other types of collection proceedings.

What is an Automatic Stay in Chapter 13?

It is important to understand that Chapter 13 bankruptcy may not completely wipe out your debts, but can give you some time and opportunity to catch up on any mortgage arrears. The process of repayment will last for three to five years, with a portion or all being repaid depending on the situation. It also helps you stay in your home.

The Chapter 13 restructuring process is effective if you have enough income to keep up with current mortgage installments and make payments on arrearages that accrued before bankruptcy. If your plan receives approval, the lender cannot foreclose. They can’t take out more than what’s allowed by law under a repayment plan. However, if you fail to meet these terms after approval of your payment scheme, then the bank has every right to move forward with foreclosure proceedings against you. 

When Does the Automatic Stay Become Effective?

When you file for bankruptcy, the automatic stay goes into effect immediately. This is the only necessary step.

Two exceptions to the automatic stay exist, however:

  • If you have one previous bankruptcy case dismissed within the past year: The automatic stay goes into effect for only 30 days after you file your first petition for bankruptcy.
  • If you have two previous bankruptcy cases dismissed within the past year: The automatic stay does not go into effect.

In order to stop a foreclosure, debtors who fall within the exceptions can file an emergency motion with the bankruptcy court. To succeed in this case, they have to prove that previous cases weren’t filed for bad faith purposes. If you convert Chapter 7 to Chapter 13 because your income is too high, the automatic stay in place during a Chapter 7 won’t apply.

What Is the Penalty for Creditors Who Violate the Automatic Stay?

A creditor or collector who continues collection efforts while you have the protection of an automatic stay faces payment of compensatory damages, reimbursement of attorney’s fees, and/or punitive damages. This is a violation of bankruptcy law if it injures a bankruptcy petitioner. It may lead to harsh consequences for the offender.

When creditors infringe on a bankruptcy stay during the filing process, it is typically because they did not know that you filed for bankruptcy. Remember to consult with legal experts such as our bankruptcy attorneys at O’Bryan Law Offices. There are important decisions at stake in these situations that have the potential to impact your personal life, finances, and future.

Contact O’Bryan Law Offices for Bankruptcy Filings

At O’Bryan Law Offices, we dedicate ourselves to helping our clients achieve a fresh financial start. Even though bankruptcy carries a negative connotation, it helps a wide variety of people every year get out of debt. If you or someone you know struggles with their finances and needs a fresh start, contact O’Bryan Law Offices today. Call our Louisville office at 502-339-0222 to schedule your free consultation with an experienced attorney.


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