• Law Office of Christopher R. Chicoine

How Does Bankruptcy Stop Creditor Calls, Collection Lawsuits?

The automatic stay.


The filing of a bankruptcy petition creates an order of relief entered by the bankruptcy court immediately when the petition is filed. Included in that order of relief is an injunction against almost all types of collection activity against the debtor personally such a collection lawsuit. If a lawsuit has been filed against you personally, the moment the bankruptcy petition is filed that lawsuit is “automatically stayed” by the bankruptcy filing.


The automatic stay also prohibits a creditor with a lien from enforcing its lien against your assets. This includes car repossessions, foreclosures, wage garnishments, etc.


There are many good reasons for the immediate imposition of the automatic stay upon filing bankruptcy. First, it gives the debtor a much-needed breathing spell from creditors. Second, in doing so, the automatic stay prevents a rush of creditors to the courthouse to be the first in-line to try to take your assets. With the bankruptcy filing, the bankruptcy court will oversee a fair and orderly distribution of any assets that you have which are not covered by an exemption. However, in many bankruptcy cases, like a chapter 7, no assets get distributed to creditors. In many chapter 13 bankruptcy cases, unsecured creditor claims like medical bills and credit card debts get paid little if anything (payments to unsecured creditors in a chapter 13 are based on the many of assets not covered by an exemption).


The automatic stay terminates when the debtor receives his/her discharge. There is good reason for this too. The discharge prevents creditors from holding you personally liable for debt. So, while the automatic stay may technically terminate, debt collectors are still unable to sue you personally because the injunction of the automatic stay is immediately replaced with the discharge injunction. The discharge, however, does not prevent a secured creditor (creditor with a lien against your assets) from foreclosing on its lien if certain requirements are met (lien foreclosure is a remedy against property; the discharge injunction bars remedies against the debtor personally).


Alternatively, the automatic stay can terminate “for cause.” Cause may include the “lack of adequate protection.” An example of lack of adequate protection would be a secured car lender with a lien against a vehicle that has no equity, is depreciating in value, and for which the debtor is not making payments after the bankruptcy filing. In such case, the secured car lender could ask the court to have the debtor make monthly payments or have the stay lifted (but, in a chapter 13, the car payments can be crammed down to a reduced amount to make them more affordable).


Attorney, Chris Chicoine

www.chrischicoinelaw.com

Christopher R. Chicoine, PLLC

DISCLAIMER - THIS IS FOR INFORMATION PURPOSES ONLY; IT'S NOT LEGAL ADVICE. DON'T ACT OR REFRAIN FROM ACTING BECAUSE OF THIS. NO REPRESENTATIONS OR WARRANTIES OR ANY KIND ARE MADE. CONSULT AN ATTORNEY.



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