For some consumers, bankruptcy is the clearest way out of debt, and one big benefit is that it limits what debt collectors can do. An automatic stay is one tool that prevents creditors and other agencies from attempting to collect outstanding debt once bankruptcy is filed. While it limits what creditors can do, some agencies are exempt, and others can get the automatic stay lifted.
What is an automatic stay?
An automatic stay is an injunction that goes into effect when a bankruptcy is filed. An automatic stay prevents some creditors from continuing to pursue collecting debt against someone. For instance, if you’re past due on your mortgage or your car loan and you file for bankruptcy, lenders can’t foreclose on your home or repossess your car.
Both Chapter 7 and Chapter 13 cases — the two most popular types of bankruptcies — allow an automatic stay. Chapter 7 is a liquidation bankruptcy, where your property is sold off to pay back your outstanding debt. Chapter 13 is reorganization bankruptcy; your property isn’t sold, but you’re in bankruptcy until your repayment plan is complete.
In either case, an automatic stay lets you work out your finances before creditors can attempt to collect a debt.
What types of debts are included in an automatic stay?
Some debts that are included in an automatic stay are:
- Foreclosure: An automatic stay stops foreclosure proceedings, allowing you to keep your home as long as your bankruptcy case is open.
- Some eviction: An automatic stay might give you temporary help, but in many cases, a landlord can continue with eviction proceedings.
- Utilities: An automatic stay prevents your utilities from getting shut off for at least 20 days.
- Government benefits: If you receive government benefits — Medicare, SNAP or unemployment benefits, for example — and you were overpaid for any of them, the agency can usually collect that overpayment. An automatic stay stops this collection.
- Most wage garnishment: If you’ve filed for bankruptcy, an automatic stay will stop wage garnishment. Depending on the debt, it could get discharged in bankruptcy.
How long does an automatic stay remain in effect?
An automatic stay is in effect as long as your bankruptcy is in effect. The type of bankruptcy will determine how long your stay is active. For Chapter 7, it’s usually a few months. For Chapter 13, it could take anywhere from three to five years.
However, if you’ve had another bankruptcy case dismissed in the past year, the automatic stay will only last 30 days. Having additional pending cases on your record may warrant no stay at all.
What happens after an automatic stay is lifted?
Since an automatic stay keeps most debt collectors and lawsuits away from you, lifting a stay or closing a bankruptcy case means that they can reach out again.
Creditors and debt collectors can also file a motion to remove (or lift) the stay before the bankruptcy case is closed. If the creditor can prove that an automatic stay hurts their business — for instance, if they can show that they’re losing money in their business — the court may grant their request. But it’s usually on a case-by-case basis, and not all courts approve lifting an automatic stay.
Ways to bounce back from bankruptcy
For many people, bankruptcy is a last resort. If this is where you’re heading, it’s OK to grieve the setback, but take a moment to view it as a new beginning. You have a chance to start over. And with that, you can take some steps to recover your finances.
Create a fresh budget
With debt behind you, create systems that work for you and your family. Whether you use an app, create a spreadsheet or write out everything by hand, a budget is your biggest tool for keeping your finances in check.
First, you’ll detail what money you have coming in, like your regular paychecks or money from a side hustle. Then you’ll list out the cost of your needs, like your home payment, utilities, insurance, food, gas and anything else that requires monthly payments. Some things, like food and gas, aren’t set in stone, so try to set a reasonable budget for them.
It’s a good idea to leave yourself a little wiggle room and start stashing money away for an emergency fund. If something unexpected comes up, like a stay in the emergency room or urgent car repairs, an emergency fund covers costs so you don’t have to borrow money through credit cards or a loan. If you have a recent bankruptcy, you’ll have a difficult time getting either, so try to save as much as you can to pay for emergencies out of pocket.
Set up autopay
Anything you can put on autopay, you should. On-time payment history will be a huge boost to your credit score (which you need after a bankruptcy). The less you have to remember, like due dates and owed amounts, the more time you can devote to other needs.
If you don’t have a home or car payment, ask your utility companies to report your payments. Even your water bill or phone payment can make a difference.
Take your time
Bankruptcies can stay on your credit report for up to 10 years, which is a long time to rebuild your credit. Avoid falling for scams touting that you can rebound from bankruptcy in a few weeks or months, and stay away from companies that ask for money to rebuild your credit.
Your credit score isn’t going to look pretty for a while, so try not to rush into anything that could make you fall into old habits, like running up credit cards, missing minimum payments and buying things that you can’t afford.
Also try to use cash whenever possible until you can responsibly use credit cards. If you do get a credit card, consider a secured credit card that reports your payments to the major credit bureaus. You’ll get the positive account activity while cautiously spending.