How filing bankruptcy immediately protects you and your assets from collection attempts by your creditors.
The “automatic stay” of federal bankruptcy law stops virtually everything that your creditors could do against you, starting the moment your case is filed and throughout the time the case is open. But how does this actually work? How can it be immediately effective? What happens if a creditor doesn’t know about it? Or what if it knows but disregards your bankruptcy filing and tries to get a judgment or continues to garnish your wages?
The Example
The best way to show how this works is with an example.
Sarah lost her job when her employer closed down its office in her state during the recession. After being unemployed for 7 months, she could only find a new job that pays her significantly less and provides her only with very limited medical insurance. With her lower income, and being behind on all her debts, she can’t afford the extra $250 for better health insurance even though she really needs it because of a serious ongoing medical condition.
Sarah owes, among other debts, a total of $15,000 in medical bills to three different providers—a hospital, an ambulance company, and a medical office, all of whom have sent their bills to collection agencies. The hospital’s collector is calling just about every day. The ambulance company’s collector has filed a lawsuit, and the deadline for Sarah to respond to it is two days away. The medical office’s collector sued earlier, got a judgment, and has been garnishing every one of her paychecks for the last three months.
After telling her story to an experienced bankruptcy attorney and being advised about her options, Sarah decides to file a Chapter 7 bankruptcy case to stop the bleeding and discharge her debts, so that she could afford to buy appropriate medical insurance and get out of her vicious cycle.
Immediate and Broad Protection
So Sarah’s bankruptcy case is electronically filed by her attorney, and, by this act of filing itself, the three collectors are legally compelled to immediately stop all of their collection actions against her or her assets. There is no delay, even to get a judge’s order.
The bankruptcy filing stops the phone calls, stops the lawsuit from turning into a judgment, and stops the garnishments. It also stops the collectors from trying any other collection efforts.
How Are Collectors Stopped if They Don’t Even Know about the Bankruptcy?
Indeed the automatic stay is effective even before Sarah’s collectors know that she filed bankruptcy. All the creditors listed in Sarah’s schedule of creditors receive a formal mailed notice of her bankruptcy case within about a week of the filing. Creditors who need to know faster than that have to be informed by whatever means of communications is appropriate to the situation.
As for the collector for the hospital who is calling just about daily, Sarah could simply tell the collector next time he or she calls that she filed a Chapter 7 case, provide the date of filing and the case number. The collector would then be obligated to end that phone call, and never call again.
As for the collector for the ambulance with the pending lawsuit that is on the brink of turning into a judgment, Sarah’s attorney would likely email or fax a notice of the bankruptcy filing to the collector’s attorney. The collector and its attorney could do nothing more with the lawsuit, other than dismiss it. This is true as long as the bankruptcy case was filed before Sarah’s deadline to respond, or after that deadline but before the creditor’s attorney sends the proposed judgment document to the state court. There’s a good argument that even if the creditor’s attorney has already sent in the judgment documents, he or she is obligated to try to stop the judge from signing them. Of course it’s better to avoid this issue by filing the bankruptcy earlier.
And as for the collector for the medical office which had already gotten a judgment and has been garnishing Sarah’s paychecks, there can be some hair-splitting about whether the pending garnishment of the current paycheck is stopped. For example, depending on state law and the precise timing, the collector may or may not be entitled to funds that Sarah’s employer has already taken out of an upcoming paycheck to comply with a garnishment court order but has not yet sent on to the collector.
If a Creditor Does Not Comply
If AFTER being informed about Sarah’s bankruptcy filing a collector continues to call Sarah, or gets a judgment, or continues garnishing, it can and likely will be punished by the bankruptcy judge for violating federal law. The automatic stay statute specifically empowers the judge to order the collector to pay for any “actual damages” suffered by Sarah for its “willful violation of the stay” (such as her attorney fees and costs in addressing the problem). And “in appropriate circumstances” the judge can require it to pay punitive damages—money paid to Sarah designed to punish the collector for its illegal behavior.
Because of this clear power by bankruptcy judges to make creditors pay for continuing collection action after a bankruptcy filing, it is very likely that Sarah’s three medical collectors will all quickly comply with the law and stop their collections right away when they are informed about her bankruptcy filing.