When debtors find themselves struggling to make payments to their creditors as they become due, they often turn to bankruptcy as a way to make it through their dilemma. Filing bankruptcy offers significant benefits to the debtor, including the statutory protection commonly referred to as the “automatic stay”. The automatic stay is designed to be an injunction, and is used as a tool to stop any attempt by the debtor’s creditors to enforce liens or collect debts. In most cases, foreclosure actions are included with other debt collecting actions that are prohibited by the imposition of the automatic stay.
When does it begin?
The automatic stay is triggered the moment the bankruptcy petition is filed for the individual or business. Once the bankruptcy petition is filed, the relief afforded by the automatic stay is immediate, and it applies in all bankruptcy cases, including Chapter 7, Chapter 11 and Chapter 13. Many states recognize foreclosure actions as a court-approved judicial process that can be stopped by the automatic stay.
However, there are states that allow foreclosure to be handled non-judiciously, or without requiring court involvement. Once the petitioner has filed bankruptcy, the automatic stay works as an injunction against any attempts to start, continue or complete a property foreclosure.
Chapter 7 Cases
In Chapter 7 cases, the assets owned by the individual or business become property of the bankruptcy estate. The trustee appointed to the case will liquidate non-exempt assets as a way to pay creditors the money they are owed. The automatic stay provides time for the trustee to evaluate and potentially sell property that could have otherwise been foreclosed on or garnished prior to the bankruptcy filing. Click here to learn more about Chapter 7.
Chapter 13 Cases
In Chapter 13 cases, the automatic stay provides a larger time frame for an individual to repay debts. Chapter 13 also allows the individual to retain property interests and avoid foreclosure, specifically by allowing the petitioner to repay debts (partial or full) and cure mortgage arrearages (which likely precipitated a foreclosure action) over a timeframe of 3 to 5 years. A Chapter 13 trustee is appointed as a gatekeeper for the individual’s creditors and is tasked with making sure the individual’s repayment plan proposes to pay what they are required to pay to creditors under the parameters of the Bankruptcy Code. Click here to learn more about Chapter 13.
There are ways lenders can seek to modify or terminate the automatic stay. The creditor (typically a car or mortgage lender) has the option of filing a “motion for relief” in bankruptcy court, seeking a termination or lifting of the automatic stay to allow the creditor to initiate or resume foreclosure or repossession actions. The debtor will have a limited time to file a response should they oppose the motion. After the bankruptcy court hearing, the judge will issue a ruling to either modify/terminate the automatic stay, or for it to remain intact. Alternatively, many lenders and debtors enter into agreements (stipulations or “consent orders”) as a way to clarify the protections of the automatic stay moving forward in the event the debtor abides by certain payment terms.
The information provided in this article is intended to provide an overview of this topic. To speak to attorney about your specific situation, please contact us today.
You can also find out more about these topics by downloading our Free E-Book “Bankruptcy 101” by clicking here.