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“Automatic” Protection from Your Creditors

Many bankruptcy attorney ads say: “Stop garnishments.” “Stop foreclosures.” “Stop repossessions.” So bankruptcy stops all those bad things. But is it as good as it sounds? How does it really work?

 

In my last blog I said that in keeping with getting a fresh start for the new year, I’d get down to basics.  There’s nothing more basic than getting immediate protection for you, your paycheck, your home, and your possessions. You get this protection the minute a bankruptcy is filed for you, either a “straight” Chapter 7 case or an “adjustment of debts” Chapter 13 one. Other than some very rare exceptions, all efforts by creditors against you or your property must come to an immediate stop. You’ll hear this referred to as the “automatic stay.”

“Stay” is just a legal word for “stop” or “freeze.” “Automatic” means that this “stay” goes into effect simultaneously with the filing of your bankruptcy petition. That filing itself, by virtue of the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or grab collateral. It doesn’t take a judge signing an order or even any further action by you or your attorney to impose the stay.

But although the automatic stay is instantaneous, practically speaking the creditors need to know about the filing of your case so that they can abide by the stay. Assuming your creditors are all listed in your schedules of creditors, they should all get informed by the bankruptcy court within about a week or so after your case is filed, without any additional action by either you or your attorney. If you are not anticipating any action against you by any of your creditors sooner than that, usually letting them all be informed by the court is appropriate. But if do expect some quick creditor action, be sure to talk with your attorney about it so you’re both on the same page about informing that creditor.

But what if a creditor unexpectedly takes some action in the days after your bankruptcy is filed but before it finds out about it? The automatic stay is so powerful that if this does happen, the creditor must undo whatever action it took against you, even if it did not know about your bankruptcy filing. So if after your bankruptcy is filed, a creditor, for example, files a lawsuit against you or turns its earlier lawsuit into a judgment, that lawsuit must be dismissed or the judgment must be set aside.

In my next blog I’ll tell you about how long this automatic stay protection lasts. If you can’t wait until that blog, give me a call or set up an appointment to see me. I’ll tell you all about it personally.

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Get a “Fresh Start” in Bankruptcy for Your Assets, Not Just Your Debts

Bankruptcy helps both sides of your balance sheet. Getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets. You can preserve this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE the filing of your bankruptcy case.

It is much more difficult to get your financial footing if you have nothing to stand on—if you don’t have at least basic housing, household goods, clothing, transportation, and, where appropriate, tools of trade, unemployment or disability benefits, and retirement savings.  

Bankruptcy usually protects most or all of your assets. On the one hand, Chapter 7 protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 lose nothing. And if you have assets which are worth more than the applicable exemptions, Chapter 13 usually protects those additional or higher-value assets as well.

But bankruptcy cannot protect what you’ve already squandered. It saddens me when just about every day new clients tell me how in the months or year or two before coming in to file bankruptcy they depleted their assets in a desperate attempt at avoiding bankruptcy. Most of the time, the assets they sold, spent, or borrowed against would have been completely protected had they filed bankruptcy while they still had them.

I recognize that it’s easy being a Monday morning quarterback—to say, after a client comes in needing to file bankruptcy, that they should not have used up assets in an effort to avoid filing. After all there undoubtedly are some people who were able avoid bankruptcy by selling their assets, and I don’t see them because they don’t need my services.

But I challenge you—if you are considering spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy?

What concerns me are decisions with serious long-term consequences made without any legal advice about the alternatives. If a person in her 50s cashes in a substantial amount of a 401(k) retirement plan to pay creditors who would be written off, that can significantly harm the quality of her retirement lifetime.  Or if a husband and wife sell a free-and-clear vehicle that’s in good condition on the assumption that they’ll lose it once they file bankruptcy, only to be left with a single older vehicle that cannot reliably get them to work, that decision would lead to anything but a fresh start.

For a bunch of reasons, people tend to get legal advice when at the absolute end of their rope, well after these kinds of dangerous decisions have been made.  Let me help you avoid that. You have the capacity to get a better fresh start by getting the necessary advice on time in order to to preserve your assets.

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