A lot of people put off bankruptcy, even when they really need it. By the time they talk to a bankruptcy lawyer, they’ve tried everything they can think of to get those creditors off their back. Borrowing from friends and family is common … or “borrowing from Peter to pay Paul,” as they say -- holding off one creditor while others get in line.
The frustrating thing is, filing for bankruptcy could really help. In virtually every situation, filing for either Chapter 7 or Chapter 13 can put an immediate halt to those creditor calls.
This is due to the “automatic stay” provided through the Bankruptcy Code. “Stay,” in this case, is an old legal term essentially meaning “stop,” and what it is stopping is collection activity.
The automatic stay goes into effect as soon as you file a bankruptcy petition. Except for a very few, specific exceptions (think child support), all of your creditors are required by law to stop their attempts to collect from you. This includes:
- Foreclosure and eviction proceedings
- Utilities from being disconnected
- Wage garnishments
- Automatic collection of overpaid benefits
If a creditor contacts you shortly after you file, you can simply refer him or her to your attorney. The bankruptcy court will notify the creditors of your petition, so they should stop calling right away.
The automatic stay halts collections until a full accounting of all your debts, your income, and your expenses can be made. If you were to continue paying one of your creditors there would be that much less available for the others, so the bankruptcy court will take your accounting, line up the creditors in order of legal priority, divvy up the available money and hand it out in that order.
The automatic stay isn’t there merely to give you breathing space, of course. It applies to most, but not all, types of debt, and your creditors can ask the court to let them continue collections if doing so would be fair.
That said, the automatic stay gives you the most immediate relief you will get from bankruptcy. It’s only a small part of how bankruptcy could help you, but freedom from threatening letters and creditor calls can be a big relief.