Many people in Eastern Tennessee have heard that a bankruptcy petition can prevent harassment by aggressive creditors, but very few understand how this happens. The answer is an automatic stay.
The automatic stay is found in the U.S. Bankruptcy Code at 11 U.S.C. §362. This section states that a bankruptcy petition automatically operates as a court order. The order states that all creditors shall immediately cease all attempts to collect debts owed to them by the debtor. The order specifically applies to lawsuits, attachment of wages and attempts to perfect or enforce any lien. Creditors who do not obey the order may face significant sanctions from the bankruptcy court. Because the order is automatic, creditors are immediately shut down in their efforts to collect debts.
The automatic stay also provides a temporary respite from a mortgage foreclosure. Mortgage debt does not go away in a Chapter 13 proceeding, but the mortgage holder must delay all collection activity until the bankruptcy proceeding is resolved. In many Chapter 13 proceedings, a more favorable repayment schedule may be negotiated, thus allowing the debtor to keep the family home.
Some debts, such as child and spousal support and past due taxes, are not affected by the automatic stay, and the debtor must continue to pay these obligations. Nevertheless, the temporary relief provided by the stay can provide enough breathing space for debtors to reorganize their finances and emerge from bankruptcy in a much better position.
An experienced bankruptcy attorney can provide helpful advice about the operation and reach of the automatic stay.