Bankruptcy Court’s Automatic Stay Has Limits; Foreclosure Action Could Be Only Delayed, Not Eliminated

Bankruptcy Court's Automatic Stay Has Limits
Foreclosure Action Could Be Only Delayed, Not Eliminated

Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC

When a family files for bankruptcy, the Court issues an “automatic stay” , which immediately prevents creditors and collection agencies from pursuing their collection efforts. And while this may seem like a huge relief, the fact is creditors may ask the Court to remove the stay, and sometimes the Court does so.

The automatic stay stops a …  

– Foreclosure, at least for the moment. Sooner or later, the Court may allow the lender to continue the foreclosure action against your home. So, if you are threatened with foreclosure, your lawyer will likely suggest that you file a Chapter 13 bankruptcy (repayment plan), rather than a Chapter 7 bankruptcy (liquidation).

– Eviction. If your landlord already has a judgment of possession against you when you file for bankruptcy, then the automatic stay will have no effect on your eviction. The landlord can proceed with the eviction, as if you had never filed for bankruptcy. However, if you file bankruptcy before your landlord gets a judgment, then the eviction action must stop unless the landlord alleges that you have been damaging the property or using illegal drugs, which could allow the eviction to continue. And even if the eviction is stopped, the landlord will likely petition the court to remove the stay – and the court will probably permit the eviction to proceed.

– Wage garnishment. When you file for bankruptcy, all garnishments stop immediately. This could work in your favor because the debt, for which the creditor may want to enforce the garnishment, could be discharged by the bankruptcy Court. The law limits the amount of money garnished from your wages to 25 percent (with a few exceptions), some people file bankruptcy even when they face potential garnishments.

– Utility cut-offs. If your utility company is threatening to cut off your electricity, gas, telephone or other service, the Court’s automatic stay will stop the disconnections for a minimum of 20 days.

– IRS action to put a tax lien on your assets or seize your income or property.

The automatic stay does not stop a …

– Support action to establish, change or collect alimony or child support, a lawsuit filed to establish paternity, or any number of other actions related to divorce or child support.

– Tax proceeding,, such as an IRS audit, notice of taxes due, or payment demand.

– Criminal action pending against you. The automatic stay does stop the collection of any fine or other financial components, but non-financial penalties will proceed.

– Loan payment made to repay money borrowed from a job-related pension or IRA.

– Collection efforts from creditors for more than 30 days if you had a recent previous bankruptcy filing unless you or another party in interest proves that the new bankruptcy was filed in good faith.

You could lose the protection of the automatic stay…

– If the Court refuses to permit the stay because you had another bankruptcy filing within one year before you filed your current case.

– If you fail to keep commitments you made for dealing with property that secures a debt.