When you file for bankruptcy, something called the “automatic stay” immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. Especially if you are at risk of being evicted, being foreclosed on, or having your wages garnished. Once the automatic stay goes into effect, then creditors may not contact you to demand payment. The constant collection calls will stop and you can have a little peace of mind.
What the Automatic Stay Can Prevent
Here is how the automatic stay affects some common emergencies:
Foreclosure: If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is usually a better remedy than Chapter 7 bankruptcy, if you want to keep your house.
Eviction. If you are being evicted from your home, the automatic stay may provide some help — but the new bankruptcy law makes it easier for landlords to proceed with evictions. If your landlord already has a judgment of possession against you when you file, the automatic stay won’t affect these eviction proceedings; the landlord can continue just as if you hadn’t filed for bankruptcy. And if the landlord alleges that you’ve been endangering the property or using controlled substances there, the automatic stay won’t do you much good, either. In other cases, the automatic stay might buy you a few days or weeks, but the landlord will probably ask the court to lift the stay and allow the eviction — and the court will probably agree to do so.
Multiple wage garnishments. Filing for bankruptcy stops garnishments dead in their tracks. Furthermore, not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy. Although no more than 25% of your wages may be taken to satisfy court judgments (up to 50% for child support and alimony), many people file for bankruptcy if more than one wage garnishment is threatened.
What the Automatic Stay Cannot Prevent
In a few instances, the automatic stay won’t help you.
Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does stop the IRS from issuing a tax lien or seizing your property or income.
Support actions. A lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or alimony isn’t stopped by your filing for bankruptcy.
Loans from a pension. Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions, 401(k) loans and IRAs).