Falling behind on payments and spiraling deeper into debt is not a choice that many people make. Often, their financial circumstances are the result of a myriad of factors, such as medical emergencies or having more financial obligations than income. Regardless of why they have trouble staying current on their debts, bankruptcy is a solution that can provide many with relief, but they may have misconceptions about the automatic stay provision.
It is important for anyone who is considering bankruptcy to understand what the automatic stay can and cannot do.
The stay does not eliminate debt
The automatic stay prevents creditors from continuing to call, garnish wages or otherwise attempt to collect on a debt. This document does not eliminate debt, though.
Bankruptcy has several chapters that correspond to different types of debt. The most common for consumers are Chapter 7 and Chapter 13. Chapter 7 allows for the discharge of most secured debts if the filer meets the income requirements. Chapter 13 bankruptcy is not as forgiving. It allows filers who have the means to repay a portion of their debts, the ability to do so in a more manageable manner by lowering and spreading their payments out over a certain length of time. Child support, delinquent taxes, alimony, student and other types of secured debts are not dischargeable in bankruptcy.
The stay prevents repossession and foreclosure
The automatic stay that goes into effect at the moment of filing does provide debtors with some relief. This document enables them to keep their utilities on while they are in shut-off status, and delays evictions, foreclosure and repossession.
The protection of the automatic stay does not last indefinitely, nor does it prevent creditors from petitioning to challenge it. The stay in Chapter 13 bankruptcy lasts throughout the length of the repayment plan if the debtor continues to meet the conditions. In Chapter 7, the stay is only for a few weeks, but it allows the debtor relief from the creditors during the bankruptcy process.
It is important for anyone who is considering bankruptcy to learn about the pros and cons of each chapter to minimize potential issues they may encounter. Delays and mistakes in the filing process or even filing under the wrong chapter can cause one to miss out on the full benefits and protections that bankruptcy can provide.