What Is Meant by Protected by Federal Bankruptcy Law?
Bankruptcy laws help individuals and companies with heavy debt loads, allowing them to get back on their feet financially. Often, debts are erased or restructured through a bankruptcy case, and the debtor has a chance to wipe his financial slate clean. To give debtors the flexibility to resolve their financial situations, federal bankruptcy law protects those who file bankruptcy cases from creditors’ collection efforts.
Automatic Stay
Under federal bankruptcy law, debtors receive the protection of an automatic stay as soon as they file a bankruptcy case. The automatic stay postpones creditor collection efforts, including foreclosures, repossessions, liens and other efforts a creditor might be able to legally take to collect on the debtor’s debts. The bankruptcy court does not have to do anything for this stay, or postponement, to become effective; it is automatic as soon as the debtor files.
Creditors cannot even continue collection calls after a debtor files his case. However, the automatic stay does not stop family support collections such as child support, and it does not affect criminal proceedings even when those proceedings involve fines or other monetary punishment.
Real Estate
The automatic stay applies to foreclosure actions as well as other debt collection. Thus, pending foreclosures are halted when the homeowner who lives in the house files a bankruptcy case.
Depending on the type of case, the house may be sold or the debtor may be given time to catch up on his back payments. In Chapter 7 bankruptcy cases, the house becomes part of the debtor’s bankruptcy estate and may be sold by the court-appointed bankruptcy trustee.
Any money left over after the mortgages are satisfied can go toward paying the debtor’s other debts. In Chapter 13 bankruptcy, the debtor can include his mortgage payments and arrearages in his repayment plan, thereby giving himself three to five years to catch up on the overdue payments.
Violations of the Stay
Though federal law protects the debtor once his case is filed, some creditors may choose not to honor the automatic stay. Creditors who violate the stay are liable to pay the debtor any actual costs caused by the violation, and under some circumstances, as determined by the court, the debtor may even receive a monetary award meant to punish the creditor for his violations.
However, before a creditor can be held responsible for violating the automatic stay, he must have been given notice of it. Bankruptcy courts send notices to known creditors, but debtors or their attorneys can also send notices to ensure the creditors know about the automatic stay as soon as possible.
Lifting the Stay
Creditors can ask the court to lift the automatic stay, thereby allowing them to resume their collection efforts. If a creditor files such a motion, the debtor has the right to respond to the motion to convince the court it would not be appropriate to lift the stay. The court will hold a hearing before ruling on whether or not to lift the stay as requested.
For example, a court might lift a stay to allow eviction proceedings against a debtor who does not pay his rent. Courts may also lift the stay to allow repossession proceedings when a debt’s collateral will be repossessed or sold anyway during the bankruptcy procedures. Debtors and creditors can also enter into agreements, called stipulations, to change the terms of the automatic stay rather than letting the court decide whether to lift it or enforce it.