Personal Finance Word of the Day: Automatic Stay

If you decide to file for Chapter 7 bankruptcy protection, the court will order an “automatic stay” as soon as you file. This prevents most creditors from trying to collect unpaid debts through phone calls, letters, or legal actions such as foreclosure, repossession, or judgment liens.

The automatic stay can prevent:

  • Eviction. An eviction can be postponed for a few days or weeks with an automatic stay. However, your landlord will usually ask the court to lift the stay. Most of the time, the court grants the request. An automatic stay might buy you some time, but it’s temporary.
  • Loss of driver’s license due to liability for damages. In some states, your driver’s license could be suspended until you pay a court judgment for damages resulting from an automobile accident. If your license has not yet been suspended, the automatic stay can prevent it from happening.
  • Utility disconnections. If utility companies are threatening to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent any disconnection for at least 20 days.
  • Wage garnishments. By law, no more than 25% of your wages can be taken to satisfy court judgments. However, many people who file a Chapter 7 do so because they are being subjected to multiple garnishments. In some cases, these multiple garnishments can lead to dismissal by employers who view the garnishment process as an increase in expense and hassle. Chapter 7 will stop wage garnishments.

In some cases, the automatic stay will not stop:

  • Actions by the IRS. Although the automatic stay will prevent the IRS from issuing a tax lien or seizing your property, they can still audit you, issue a tax deficiency notice, demand a tax return, issue a tax assessment, or demand payment of an assessment.
  • Support actions. Filing Chapter 7 will do nothing to stop a lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or alimony.
  • Administrative freezes. If you owe money on a bank loan where you have a checking account, the automatic stay will prohibit the bank from seizing your account to pay for what is owed. However, the bank can still freeze your account so your money is unavailable for withdrawal. Your account will remain frozen until the bankruptcy court determines if the debt is to be discharged.

Source: The Institute for Financial Counseling