Bankruptcy leads to an automatic creditor stay

On Behalf of | Dec 16, 2021 | Personal Bankruptcy

Aggressive collection actions could make life even more stressful for someone dealing with debt. Even if the collections process is fair and professional, an Arkansas debtor might still find the process overwhelming. Someone unable to pay past due accounts might find dealing with creditors impossible, so the person files for bankruptcy. Under federal bankruptcy laws, credit actions become subject to an automatic stay.

The automatic bankruptcy stay

Collection actions may not go away entirely during bankruptcy, as the court could order specific debts paid. Some debts won’t go away even with a successful bankruptcy, as the court lacks the authority to discharge them. However, the automatic stay provides a temporary stop order on creditors and collectors, including government agencies.

The automatic stay remains in effect during the court proceedings. Collection agencies that attempt to ignore the court and continue to collect debts owed may find themselves in legal trouble.

A debtor worried about foreclosures or repossessions may feel relief when the automatic stay goes into effect. That said, creditors may ask the court to allow collections to continue under certain circumstances. Even so, creditors must go through the court, and the judge has the final say.

Bankruptcy proceedings and paying debts

Some may assume that filing for bankruptcy means no creditor receives any payments. That is not the case, and some obligations, such as alimony and child support, receive no holds. And creditors may receive court-ordered payments during bankruptcy proceedings.

Chapter 7 liquidation bankruptcy involves what the name states. Available assets may face liquidation orders to pay some debts. Not everyone can pass the means test for Chapter 7, so they enter Chapter 13, which requires a payment plan. Still, filing for bankruptcy could be far better than continuing to deal with creditors.