What Collection Actions Does a Bankruptcy Stay Not Stop?
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
When you file for bankruptcy, an automatic stay immediately stops your creditors from taking all collection actions against you. At once, they are forbidden from calling you, sending statements or collection letters to you, or filing lawsuits against you.
however, in some situations the automatic stay doesn’t apply. Here is the list of exceptions:
If you filed two bankruptcies within one year, then the automatic stay is limited to 30 days. This is because the court presumes that you filed the second bankruptcy in bad faith. However, if you can prove to the court that you filed the second case in good faith, then the court may lengthen the automatic stay.
If you filed three bankruptcies within one year, then you get no automatic stay at all because the court presumes the third bankruptcy was filed in bad faith. If you can prove to the court that you filed the third case in good faith, then the court may extend the automatic stay.
If you filed a personal bankruptcy that is later dismissed and then you file a joint bankruptcy with your spouse within the same year, the limitations on the automatic stay apply only to you. Your spouse will get the benefit of the automatic stay unless your spouse had earlier filings within the same year.
Criminal proceedings can move forward regardless of bankruptcy’s automatic stay. This means that if you are on trial for writing bad checks, your case can move forward without regard to the automatic stay. However, if the creditor is pursuing the criminal case in an effort to collect the debt, the court may consider that a violation of the stay
Family law benefits such as child custody and visitation rights, as well as domestic violence proceedings, can continue during the automatic stay. In addition, divorce proceedings may continue as long as the divorce is not dividing the estate’s property.
Child Support & Alimony
Bankruptcy gives special treatment to collecting child support and alimony, depending on whether you have filed for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy: In this case, income you earn after filing for bankruptcy can be collected to pay for child support and alimony.
Chapter 13 Bankruptcy: In this case, income you earn after filing for bankruptcy is safe and your bankruptcy filing stops all actions to collect child support and alimony. Depending on the laws of your state, however, a person or legal entity may be able to enforce a child support or alimony obligation by (1) seizing an income tax refund; (2) forcing you to pay for a minor child’s medical care, if that is an obligation of yours; or (3) suspending a license issued by the state.
In either Chapter 7 or Chapter 13, court proceedings can continue to establish paternity or to change a child support or alimony requirement.
Loans from Retirement Accounts
If you have a loan from your 401k, you can withhold wages to repay your retirement account without violating the automatic stay. This exception to the automatic stay is most often in your best interest. By allowing you to withhold these funds, it permits you to avoid the penalties for defaulting on these loans.
While the automatic stay stops IRS from collecting taxes and issuing a tax lien against your income and property, it will not prevent IRS from demanding and auditing tax returns, or assessing taxes.
Evicting Residential Tenants
The automatic stay does not apply in certain situations where you face eviction from a rental unit or home when you file for bankruptcy.
Landlord has a Judgment for Possession: If the landlord has a judgment for possession against you before you file for bankruptcy, then the automatic stay does not protect you. You can get 30 days of stay protection by doing two things:
(1) file a statement that says the judgment allows you to remain on the premises when you satisfy the judgment, and
(2) deposit the rent that will become due in the next 30 days with the clerk of the bankruptcy court.
Endangerment or Drug Use Eviction: If the landlord files with the court a certificate stating that the eviction is because of your endangerment to the property or due to your illegal use of drugs, then you have 15 days to respond. If you do not respond or lose the case, the automatic stay does not apply.
Motion Seeking Relief from the Automatic Stay
Secured creditors, such as mortgage lenders, can file a motion seeking relief from the automatic stay. Often this happens when the homeowner is behind in his house payments. In the motion, the lender asks the bankruptcy court to allow it to move forward with foreclosure proceedings. If the homeowner does not respond, the court usually grants the lender’s request and permits the lender to begin foreclosure action.