When a consumer files for Chapter 7 or Chapter 13 bankruptcy, the court issues an automatic stay that prevents creditors from trying to collect on debts. This effectively puts a halt on written demands, as well as phone calls, emails and personal visits. Some filers appreciate this because it takes away one of the big stressors that they deal with daily.
The purpose of the automatic stay is to ensure that there aren’t any creditors who receive preferential treatment. The bankruptcy court has a specific way that it pays off creditors. It is based on the legal priority of the debt. Certain ones are paid before others, so creditors are sometimes concerned that they won’t receive the full balance of the debt. This is a valid concern because lower priority debts usually only receive a portion of what’s due. The remainder of the balance is discharged when the bankruptcy is finalized.
The automatic stay can also have another impact on you while you get your finances in order. It can temporarily halt evictions, utility disconnections and foreclosures. These are only temporary measures, so you must ensure that you’re working on a plan to get caught up on the account quickly.
If you’re subjected to a wage garnishment, that will also stop with the filing. The garnishments will begin again when the automatic stay is lifted unless you’ve paid the account off before then or unless the debt was included in the bankruptcy.
Understanding exactly how a bankruptcy filing will impact you is important because you need to make an informed decision about this major life event. Working with someone who is familiar with the practical aspects of it may be beneficial.