The Automatic Stay is a very powerful protection in bankruptcy. It is a court ordered injunction that protects the debtor from creditors after filing a bankruptcy petition. It prohibits creditors from seizing the debtor’s property, garnishing wages, levying bank accounts, foreclosing on real estate, or repossessing property. It can stop the IRS, a lawsuit or other legal action.
How does the automatic stay work?
It goes into effect the second the bankruptcy case is filed. This means the debtor is not required to give notice of the automatic stay. It is effective immediately. Therefore, if you have a foreclosure pending at 10:00 a.m. tomorrow, and you file your bankruptcy at 9:59 a.m., and someone shows up at your door to show you they purchased your home at the foreclosure auction, that purchase is VOID. Void means the sale was invalid, it has no legal effect, and it cannot be validated later. It is treated as if it never happened.
The bankruptcy stopped the foreclosure sale even though the foreclosing lender and the auction buyer had no notice. That is very powerful. No one should ever risk waiting until the last minute to file a case. There could be a computer error, the court’s e-filing system could be down, internet could be down, etc. If a creditor violates the automatic stay, the creditor is violating a federal court order and liable for any damages caused by the creditor’s unlawful actions.
What is a discharge violation?
A discharge injunction is a federal bankruptcy court order reliving the debtor of all dischargeable debts under 11 U.S.C. ‘ 523 of the Bankruptcy Code. A creditor may not attempt to collect a discharged debt. If the creditor violates the discharge order, the creditor may be held liable for any damages caused by its violation.
Violating the discharge order impedes the fresh financial start the debtor is entitled to under the law. A debtor should understand the difference between in personam liability and in-rem liability because a discharge applies to the debtor’s personal liability. For example, a debtor who owns a vehicle subject to a valid, perfected lien (usually an auto-loan) must continue to pay the loan after bankruptcy if the debtor wishes to keep the vehicle. If the debtor does not want the vehicle, the vehicle will be surrendered in bankruptcy. If the debtor fails to make payments on a vehicle they are keeping after the bankruptcy discharge, the lender can repossess the vehicle and that would not violate the discharge.
If you are having financial problems, the sooner you hire qualified bankruptcy counsel, the better your result will be. We need time to strategize your case to maximize the benefits and minimize the risks. We want you to be in the best position possible to file your case. Your attorney will explain this to you.
Author: Jenny L. Doling, Esq., LLM Taxation
CA State Bar Certified Bankruptcy Specialist
Secretary and Board of Director of NACBA
President of the San Diego Bankruptcy Forum
Serving Bankruptcy Clients throughout California and
Tax Clients Nationally