Bankruptcy Protection

During the bankruptcy process (while your debts are being wiped out, reduced, or otherwise managed) the Bankruptcy Court also can protect you from your creditors.  For example, your income is protected from being garnished, your bank accounts are protected from being seized, your car is protected from being repossessed, and your home is protected from being foreclosed.

Your property is protected by what is called “the automatic stay.”  The automatic stay is an injunction which applies to almost all new bankruptcy cases and stops almost all creditors from taking action to collect debts that you owe. It is “automatic” because the court order applies automatically to most new cases.  You usually do not need to go into bankruptcy court to get this protection [see next paragraph, however].  It is called a “stay” because the court order “stays” or stops the creditors from collecting on their debts.

The 2005 Bankruptcy Act changed the automatic stay provision of the Bankruptcy Code that had been in effect since the 1978 Bankruptcy Code was adopted.  Since October 2005, if any other Chapter 13 cases were open and then dismissed during the 12 months prior to filing the new Chapter 13 case, the automatic stay is greatly limited or may not go into effect at all.  However, if the prior case was completed and “discharged“, this limitation does not apply and the automatic stay goes into effect as normal.  The limitation on the stay only applies if the prior case or cases were not completed and were dismissed.

If only one dismissed case had been pending during the previous year, the debtor must file a motion (request) for the automatic stay protection to continue throughout the case and the judge must approve it all within 30 days of the case filing date, otherwise the protection will simply stop after 30 days.  If more than one dismissed case had been pending during the previous year, the automatic stay does not automatically start at all. In order to get the stay protection to begin, the debtor has to immediately file a motion asking the court to start the protection.  And, if the same 30 days expires, then the way the law is worded, the automatic stay will never even start.

If you were in a Chapter 13 case that was dismissed within the last year and you want to file a new Chapter 13 case – you will need to have legal assistance.  It is virtually impossible for non-lawyers to understand how this confusing law works and to figure out how to get the stay extended or started.  It is confusing, and it is also absolutely essential to the success of your case.  If you lose the stay protection, your bankruptcy case will not help you very much since your creditors will be able to take all the actions to collect from you – just like they could before you filed the bankruptcy case.

The 2005 Bankruptcy Act also eliminated stay protection for collection of child or spousal support obligations.  In addition, the bankruptcy automatic stay does not stop criminal prosecution.

 

Bankruptcy Protects Against Most Normal Collection Actions

Protection from collection for debts that existed before filing for bankruptcy:

If you owe a debt and the creditor has not sued you yet, it cannot start a lawsuit against you after you file bankruptcy under normal circumstances. For example, once you file a bankruptcy, a credit card company can’t sue you in state court for the unpaid bill.

If the creditor has sued you and has not received a judgment against you, it cannot do anything to get a judgment in state court against you after you file bankruptcy. For example, if you’ve been sued and you are worried about going to trial, in most cases filing the bankruptcy will stop the trial (except a criminal trial, for example).

If the creditor has received a judgment against you, the creditor normally cannot do anything to collect their judgment from you. For example, if your employer has received an order from the Sheriff to garnish your paycheck, the garnishment will usually stop once you file a bankruptcy. In some situations, you may be able to get money back from the Sheriff that hasn’t been sent on to your creditor.

If the creditor recorded a lien to enforce a judgment against you, it cannot enforce its lien against you or against your property. For example, if an abstract of judgment has been recorded as a lien on your home, the creditor cannot force a sale of your home, and in most situations another section of the Bankruptcy Code may allow us to get the lien removed from your property.

Protection for property of your bankruptcy estate while you are in a bankruptcy:

Creditors cannot take property of your bankruptcy estate. For example, your car lender cannot repossess your car while you are in bankruptcy under normal circumstances.

Creditors cannot put a lien on property of your bankruptcy estate usually. For example, while you are in a bankruptcy, even the IRS is usually prohibited from putting a lien on property of your bankruptcy estate, even for taxes which come due during the bankruptcy.

Creditors cannot enforce a lien on property of your bankruptcy estate. For example, your home lender cannot start or continue with foreclosure proceedings on property of your bankruptcy estate while you are in bankruptcy without first asking permission from the bankruptcy court.

It’s easy to say these words, but there are exceptions and ways in which creditors could be allowed by the Bankruptcy Court to do these things anyway.

The usual exception is where a creditor would be allowed to act against your property after you file a bankruptcy would be where a mortgage lender files paperwork in the Bankruptcy Court asking for permission (called “relief” from the automatic stay) to start or to continue foreclosing on a home. The actual procedures for a “motion for relief from the automatic stay” and for home foreclosure in California are covered on other pages on this website, but in essence, the lender files papers and we have a hearing in front of the Bankruptcy Judge.

Normally, the lender says that it is in terrible jeopardy because it has not been receiving its monthly mortgage payments, and that the longer this continues the more money it will lose. The lender then says that in order to protect itself, it needs permission to foreclose on the home. The judge has a responsibility to protect the lender, and will order that the borrower start making monthly payments to provide “adequate protection” to the lender.  Or if the situation looks really bad, the judge may give the lender “relief from the stay” (permission) to either start the foreclosure process, or even to go all the way to a foreclosure sale.

Our job at Relief from Stay hearing is to explain our client’s situation and try to persuade the judge to allow our client to make payments to catch up on the missed mortgage payments, or give our client time to get a mortgage loan modification, or find some other way out of this problem.

Bankruptcy Judges are usually willing to give debtors a reasonable chance to save their homes when lenders request relief from the automatic stay. They are willing to listen to our side of the argument, and they are willing to consider solutions to these problems which are tailored to our clients’ individual situations in order to give them a chance to save their homes. This is not true in some other areas of the country. Some judges in other areas have reputations for severity and harshness.  Luckily that is not the case here in Santa Clara County.

Here are some examples of things creditors are generally not allowed to do as soon your bankruptcy case is filed:

  • Car lenders cannot repossess your car, even if you are behind on your payments
  • A creditor with a judgment on a lawsuit cannot garnish your wages
  • The IRS and California Franchise Tax Board cannot garnish your wages
  • Creditors cannot seize your bank accounts
  • Home lenders cannot record a Notice of Default or Notice of Trustee’s Sale on your house
  • Home lenders cannot sell your house in a foreclosure sale