Helping With Your Financial Future

Bankruptcy and the automatic stay

On Behalf of | Mar 9, 2022 | Consumer Bankruptcy

When California residents file Chapter 7 or Chapter 13 bankruptcies, the judges handling their cases issue what are known as automatic stays. This is a court order that is designed to protect people who file for bankruptcy while their cases are pending, and it prevents creditors from taking any further action to collect unpaid debts. While an automatic stay is in place, creditors may not foreclose on property, repossess vehicles or other assets, or file debt-related lawsuits.

Creditor protection

Automatic stays protect creditors as well as debtors. If they are not issued, creditors that learn about bankruptcies could take the initiative and seize property before others have a chance to take action. Debts are prioritized in bankruptcy cases to make sure that any available funds are allocated fairly, and an automatic stay is a tool the court uses to ensure these rules are followed. However, there are situations where courts may deem automatic stays unfair and agree to lift them.

Lifting an automatic stay

This rarely happens unless creditors can convince the court that the automatic stay will do more harm than good. These arguments are usually made when an asset that is collateral on a secured debt included in the bankruptcy is likely to depreciate in value significantly during the course of the case. Automatic stays may also be lifted if they are preventing creditors from seizing assets that are not owned by the person who filed the bankruptcy.

A fresh start

Many people believe the bankruptcy process punishes people who find themselves in unmanageable financial situations even if they suffered setbacks due to circumstances beyond their control, but that is just one of the many myths surrounding debt relief. The bankruptcy code was written to offer the chance of a fresh start, and an automatic stay is a tool the courts use to help those seeking to escape from overwhelming debt.