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What is the automatic stay in bankruptcy?

Most residents of Rockland understand that filing for bankruptcy is one way to manage an overwhelming amount of debt, but very few understand how that happens. One of the most important provisions of the United States Bankruptcy Code is the so-called "automatic stay." This post will explain the mechanics of the automatic stay and show how it can be used to manage all sorts of debts.

The automatic stay is contained in 11 U.S. Code ยง362. When a person files a bankruptcy petition in either Chapter 7 or Chapter 13, the bankruptcy court in which the petition is filed automatically issues an order - called a "stay" - that stops almost all actions by creditors to collect on obligations owed by the debtor. The debtor must provide the name and address of each creditor so that the court can provide notice of the automatic stay. The automatic stay is intended to give the debtor breathing space to work out a plan of reorganization in a wage earner bankruptcy or collect and sell assets to reduce debt in a Chapter 7 liquidation. The issuance of the automatic stay does not determine whether a debt must be paid; that issue must await the outcome of the bankruptcy proceeding.

The automatic stay prevents creditors from filing suit to collect a debt and proceeding in lawsuits already filed. The automatic stay also prevents banks and other lenders from moving forward with mortgage foreclosure proceedings. Wage garnishments are also stopped. Some proceedings are not affected by the automatic stay. A lawsuit to collect past due child support will not be stopped, and the automatic stay will not prevent the IRS from instituting collection procedures.

The automatic stay can be a life-saving remedy, but the statute has some important exceptions, including a provision that allows creditors to seek the court's permission to continue collection proceedings. Anyone considering bankruptcy may wish to consult a knowledgeable bankruptcy lawyer about the consequences of filing a petition and the effects of the automatic stay.

Source: FindLaw, "The Automatic Stay: Stopping Creditors with Bankruptcy," accessed on July 2, 2017

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