When an individual files a chapter 7, 11 or 13 bankruptcy, collection efforts stop under an automatic stay. Any collection activity against the debtor and the debtor’s bankruptcy estate is off limits as the process moves forward.
The bankruptcy estate is comprised of interests of the debtor including, but certainly not limited to, tangible property such as a home, car and cash, or in cases where a bankruptcy filer owns a business, may also include inventory, accounts receivable, unpaid contracts and more.
As soon as the bankruptcy is filed, creditors are expected to:
- Stop contact, which includes robo calls, collections calls, emails, letters and the like
- Cease collection efforts such as litigation, foreclosure proceedings, and enforcement actions
- Stop negotiations/new contracting such as mortgage modifications, payoff plans, or wage garnishment
Although an automatic stay is instantaneous, it may only buy a debtor so much time as the creditor can request a motion for relief from stay allowing them to resume collection efforts. If a creditor can show cause exists to lift the automatic stay, a court may grant relief.
Situations where this might come into play is if a homeowner allows a home in the bankruptcy to fall into disrepair or lets their home insurance lapse. Factors such as not properly caring for or maintaining collateral in a bankruptcy could diminish its value and therefor the court may find cause to lift the automatic stay. If the motion for the relief from stay is granted, collection activities may proceed.
If, on the other hand, a court denies the creditor’s motion for relief from an automatic stay, the collateral (house in this example) remains part of the bankruptcy estate and is subject to the protections of the stay including no foreclosure or litigation. For other types of collateral such as a car, no repossessions. It is best to work with an experienced attorney to represent your interests regarding an automatic stay.
If you have fallen behind on your mortgage or car payment or if you are a struggling business owner, it is important to discuss your concerns with an experienced bankruptcy attorney – the sooner the better so you can make well-informed decisions. Your attorney will work with you to determine if bankruptcy protection is a good strategy for your financial situation, helping you to make the best financial decisions for you and your family. If you have questions regarding chapter 7, 13 personal bankruptcy or chapter 11 business bankruptcy, contact Peoria bankruptcy attorney Charles E. Covey for immediate assistance today at 309-674-8125.