One of the most stressful aspects of being deeply in debt is the repeated calls from creditors and bill collectors. While most such individuals are ethical and obey the limits set forth in federal and state statutes, many are unscrupulous and frequently resort to unethical measures, such as harassment and false threats of litigation, to coerce the debtor into paying a debt. The federal bankruptcy code contains a provision that usually brings these burdensome collection efforts to an immediate stop. The provision is called the “automatic stay.”
How does the automatic stay work?
Every person who files a bankruptcy petition must provide the court with the names and addresses of all creditors. The court then uses this list to send a notice to every creditor telling them to immediately halt all ongoing collection efforts and to refrain from any further collection efforts. This notice is the so-called “automatic stay.” The penalty for ignoring the stay can be severe, including a citation for contempt of court.
Pros and cons of automatic stay
The essential benefit of the automatic stay is time; the entry of the stay order puts all credit disputes on indefinite hold, giving the debtor breathing space that can be used to negotiate a settlement of the debt.
The downside of obtaining an automatic stay is the penalties that can be imposed if the debtor fails to make required payments to either the trustee or to any party who is the mortgagee on one or more of the debtor’s obligations secured by a mortgage.
The debtor should also be aware that a creditor can move the court for an order modifying or lifting the automatic stay if the debtor fails to keep up required payments.
As with the initial decision to file a bankruptcy petition, a debtor who wants to take advantage of the automatic stay should review the consequences of the stay with an experienced bankruptcy attorney. A bankruptcy lawyer can review the assets in the debtor’s estate and provide advice on how to approach the discharge or negotiation of various debts.