The most powerful aspect of declaring bankruptcy is the automatic stay. So, what is it and how does it work? At the moment your bankruptcy case is filed with the court, the automatic stay goes into place. It prevents creditors from calling, lawsuits from being filed against your name, and if you have a pending foreclosure sale in the works, the sale must be cancelled.
Breathing room for debtors
Bankruptcy was designed to give debtors “breathing room” which means that all creditors must halt collection activity while you go through your finances with your bankruptcy attorney. During this time, a bankruptcy trustee will be assigned to your case to look over all of your debts and assets and determine what can be paid and what debts can be wiped out once your discharge is granted.
It does not matter if you file a chapter 13 or a chapter 7, the automatic stay will go into effect and protect you from creditors.
Penalties for creditors that violate the stay
There are consequences when a creditor violates the automatic stay, regardless of whether it is deliberate or not. Many creditors and law firms collecting debts on their behalf face lawsuits when they continue collection efforts against a debtor in active bankruptcy.
There are a few things you will want to look out for after you file your case. Do you have any automatic payments deducted from your checking accounts going to creditors? Often these payment mechanisms are not halted, and you are entitled to have that money returned. If you are still getting calls or letters demanding payment, let your bankruptcy attorney know immediately so action can be taken.
If there are debts you want to keep current, discuss this with your attorney before you file your petition. You can file a reaffirmation agreement with the court if you have secured debt such as a vehicle or home and want to avoid repossession. The reaffirmation agreement is a collaboration between your attorney and the creditor which is then filed with the court and reviewed by the judge. That debt will not be discharged or subject to the permanent injunction that prevents collection of discharged of debt once your bankruptcy case is closed.