Bankruptcy is often recommended to Florida residents as a method of stopping collection actions by creditors. This statement on its face seems to be too good to be true. However, understanding the mechanics of a judicial device called the “automatic stay” can illuminate how filing a bankruptcy petition has this seemingly magical effect.
What is the automatic stay?
When a person files a bankruptcy petition under either Chapter 7 or Chapter 13, the debtor must also file a list of the names and addresses of all creditors and the amount that is owed to them. The United States Bankruptcy Code requires the clerk of the bankruptcy court where the petition is filed to issue an order to all of these creditors halting any and all collection activities against the debtor. This order is called a “stay” and it issues automatically from the bankruptcy court, hence the name “automatic stay.”
A stay is a court order that halts actions by a private party. In bankruptcy court, the stay is an order directed at creditors. The purpose of the stay is the prevention of creditors from taking individual action that might reduce the bankruptcy estate available to pay the claims of other creditors.
What claims are subject to the stay?
The language in the Bankruptcy Code that creates the automatic stay is very broad. The stay applies to “all entities” and affects “the commencement or continuation” all types of collection actions, including judicial proceedings such as foreclosure, any act to perfect a lien against the debtor’s property, and any act to collect a claim that existed before the filing of the petition. The claim must have existed before the filing of the bankruptcy petition.
Some claims are exempt from the automatic stay. Exempt claims include civil actions to collect child support, establish paternity, and actions concerning child custody or visitation.
How long does the stay last?
The stay lasts until the court issues its final order granting or denying the initial petition. The court can also lift the stay before the proceeding ends if it finds grounds for doing so.
Anyone who is considering filing a bankruptcy petition may wish to consult a knowledgeable bankruptcy attorney for advice on the effect of the automatic stay. Each bankruptcy case is unique, and the automatic stay may have different results in different cases.owH