Understanding bankruptcy’s automatic stay rule

On Behalf of | Mar 23, 2022 | personal bankruptcy |

Worries about how to pay massive debts could leave many people feeling anxious. A person’s state of mind might worsen when creditors call to collect what the individual owes. Laws exist to protect people from collection agency harassment, but not every creditor or collector follows the law. However, anyone who files for bankruptcy in an Illinois federal court could take advantage of the automatic stay.

The automatic stay rule

When someone files for bankruptcy, an automatic stay goes into effect. An automatic stay means creditors and collection representatives can no longer take action against the debtor. No matter what chapter someone files, the law remains the same: creditors and representatives are mostly sidelined. The bankruptcy court judge has the final say on matters related to debts.

If creditors continue collection actions against someone entered into bankruptcy, legal problems might arise. Namely, the debtor could sue anyone who violates the automatic stay provision.

Creditors have some say

There are some limited options available to creditors. Creditors could question debtors during the bankruptcy hearings. They might also request the court lift the automatic stay when the creditor’s assets may depreciate. Again, the bankruptcy court would make decisions regarding the debtor’s case.

Filers should not assume that all debt becomes discharged. With Chapter 13 bankruptcy, only some debts get discharged, and a payment plan addresses the remaining obligations. Even with Chapter 7 bankruptcy, creditors may receive substantial payments. Chapter 7 refers to liquidation bankruptcy, and liquidated assets pay some of the debts owed. Eligible remaining debt becomes discharged.

Not all debt may be discharged, though. Debtors would still need to pay debts the courts cannot wipe away, such as child support and specific tax obligations.