When you are facing a foreclosure sale, a wage garnishment, a lawsuit, or constant collection calls, it can feel as though you have no control over your financial life. One of the most immediate and powerful tools available to the clients we serve who file for bankruptcy is the automatic stay, a federal order that halts most collection actions the moment your petition is filed. Here is how the automatic stay works and what it can and cannot do.

What Is the Automatic Stay?

The automatic stay is an injunction that arises automatically under federal law as soon as a bankruptcy petition is filed under Chapter 7, Chapter 13, or any other chapter of the Bankruptcy Code (11 U.S.C. § 362(a)). No separate court order or hearing is required. The stay takes effect immediately upon filing, and it gives you breathing room to reorganize your finances or pursue a discharge without creditors pursuing you at the same time.

What the Automatic Stay Stops

The automatic stay broadly prohibits creditors from taking action to collect pre-bankruptcy debts or to obtain or control the debtor's property (11 U.S.C. § 362(a)). In practical terms, it generally stops foreclosure sales of your home; vehicle repossessions; wage garnishments and bank levies; lawsuits seeking recovery on claims that arose before the bankruptcy filing, including cases that are already pending; enforcement of civil judgments and the creation or enforcement of liens; collection calls, letters, and other collection efforts; and setoffs of certain debts owed to the debtor.

Utility companies also may not discontinue service solely because of the bankruptcy filing or an unpaid pre-bankruptcy bill, although they may require a deposit or other adequate assurance of future payment within 20 days after filing (11 U.S.C. § 366).

What the Automatic Stay Does Not Stop

The automatic stay is broad, but it has exceptions (11 U.S.C. § 362(b)). It generally does not stop criminal proceedings; actions to establish paternity or to establish or modify domestic support obligations; certain government regulatory and police power actions; tax audits, issuance of tax deficiency notices, and certain tax assessments; and in certain circumstances, eviction proceedings where the landlord obtained a judgment for possession before the bankruptcy was filed, or where the eviction is based on endangerment of the property or illegal drug use (11 U.S.C. § 362(b)(22), (b)(23), (l), (m)).

Protection for Co-Signers in Chapter 13

In Chapter 13, the protection can extend beyond the debtor. The "co-debtor stay" generally prevents creditors from pursuing a friend or family member who co-signed a consumer debt while your Chapter 13 case is pending, subject to certain exceptions (11 U.S.C. § 1301).

How Long Does the Automatic Stay Last?

In general, the automatic stay remains in effect until the case is closed or dismissed, or until a discharge is granted or denied (11 U.S.C. § 362(c)). Protection against collecting discharged debts then continues permanently through the discharge injunction (11 U.S.C. § 524).

Repeat filers face important limits. If you had a prior bankruptcy case dismissed within the year before your new filing, the automatic stay may terminate after 30 days unless the court extends it on a timely motion showing that the new case was filed in good faith (11 U.S.C. § 362(c)(3)). If two or more prior cases were dismissed within the past year, the stay may not take effect at all unless the court orders otherwise (11 U.S.C. § 362(c)(4)). If you have filed before, planning is especially important.

When Creditors Can Ask for Relief From the Stay

A creditor may ask the bankruptcy court to lift or modify the automatic stay. The court must grant relief for "cause," including a lack of adequate protection of the creditor's interest in property, such as when a debtor is not making payments on a vehicle or home and the property is losing value (11 U.S.C. § 362(d)(1)). The court may also grant relief as to property in which the debtor has no equity if the property is not necessary to an effective reorganization (11 U.S.C. § 362(d)(2)). With limited exceptions, the stay terminates automatically 30 days after a creditor requests relief unless the court orders it continued (11 U.S.C. § 362(e)). Responding promptly to a motion for relief is essential to protecting your property.

What Happens If a Creditor Violates the Stay?

In the Ninth Circuit, which includes California, actions taken in violation of the automatic stay are generally void, not merely voidable (Schwartz v. United States (In re Schwartz) (9th Cir. 1992) 954 F.2d 569). That means, for example, that a foreclosure sale conducted in violation of the stay may have no legal effect.

In addition, an individual injured by a willful violation of the stay may recover actual damages, including costs and attorney's fees, and in appropriate cases, punitive damages (11 U.S.C. § 362(k)). If a creditor continues to garnish your wages, contact you, or pursue collection after you file, keep records of every contact and notify your attorney immediately.

Timing Can Make All the Difference

Because the automatic stay takes effect the moment a petition is filed, a properly prepared bankruptcy filing can stop a foreclosure sale scheduled for the next day or prevent the next garnishment from reaching your paycheck. However, rushing into bankruptcy without careful planning can create problems, including choosing the wrong chapter, failing to protect assets with the right exemptions, or triggering repeat-filer limitations. The best results come from planning ahead whenever possible.