Bankruptcy is often hyped as an effective way to gain protection from outstanding debts and the businesses trying to collect them. Unfortunately, the exact method of the protection is not well known. In this post, we will provide a description of how this protection works.
11 U.S. Code §362
The United States Bankruptcy Code contains a provision in Sec. 362 that describes the mechanics for issuing an automatic stay against the claims of creditors. A stay is general lawyer-speak for an order that stops a proceeding. Under Sec. 362, the filing of a petition under Chapter 7 or Chapter 13 automatically operates to issue a stay that applies to all of the debtor’s creditors. The stay prevents these creditors from taking any further action to collect their debts.
For example, a bank cannot commence foreclosure proceedings after the stay is issued. A bank that made a loan to permit the debtor to buy a car cannot do anything to collect that debt even if it is past due. Perhaps most importantly, credit card companies must immediately cease collection activities until the bankruptcy proceeding is resolve.
Effect of stay
The automatic stay may not have a great effect on the bankruptcy proceeding because it does not change the amount or terms of the underlying debt. However, the stay gives most debtors time to negotiate with their creditors, and this extra time can provide enough time to allow the debtor to re-negotiate many of their obligations. Unless the court grants prior relief, the stay is lifted when the court issues its order resolving the bankruptcy.
Consulting an attorney
The advice of an experienced bankruptcy attorney can be very helpful in determining the exact effect of the stay, i.e., what debts are covered and what debts are not. The availability and extent of the stay may help determine whether to file under Chapter 7 or under Chapter 13.