When someone files for bankruptcy an injunction prohibiting creditors from doing anything to collect from the person filing the bankruptcy automatically falls into place. The injunction is called the “Stay” and if a creditor violates it there are serious consequences for that creditor. But, the stay does not remain in effect for ever.
As soon as someone files for bankruptcy their property becomes the property of the Bankruptcy Estate. Some of that property is exempt from use to pay debts so the bankruptcy trustee cannot use it and the creditors cannot rely on it for payment. The remaining property is protected by the stay to give the bankruptcy trustee time to decide what to do with it. Some of it may be valuable and provide a source of funds to pay creditors with and other property may be more trouble than it is worth so the trustee will just abandon it back to the debtor. Both types of property are protected by the stay.
If property is abandoned by the bankruptcy trustee back to the debtor that property is protected by the aspect of the stay that protects the debtor. In other words, those creditors having claims against the debtor before the bankruptcy was filed cannot look to the debtor or the property abandoned back to the debtor for payment.
The stay normally remains in effect until a discharge of debts is granted or the case is closed but there are exceptions. The most common exception comes when a creditor seeks relief from the stay by filing a request with the court (a motion) seeking permission to proceed against collateral. If the creditor can prove up a good faith case the court will lift the stay and allow the creditor to foreclose on the property, sometimes real property and sometimes personal property.
In some cases the stay will automatically expire. For example, in situations where the debtor has given personal property as collateral for a loan the stay automatically expires 30 days after the day the case was filed unless the debtor has filed a statement of intention specifying what the debtor intends to do with the property, return it, redeem it (pay for it out-right) or reaffirm the credit agreement and continue to make payments under the reaffirmed agreement. If the debtor fails to act under the statement of intention within in 30 days after the first meeting with creditors (341a hearing) the stay will automatically end also.
In Chapter 7 cases where a creditor has an allowed claim based upon having a purchase money security interest in the debtor’s property the stay will expire 45 days after the first meeting of creditors (341a hearing) unless the debtor agrees to redeem the property or to reaffirm the debt and make payments on it. The claim must be an allowed claim which means that the creditor must have filed a proof of claim before the deadline to file such proofs passed.
Finally, in individual debtors in chapter 7 cases, the stay ends when the discharge is granted. This is because it is no longer needed because there is no longer a debt to be collected from the debtor. In this case, not only is the debt extinguished, but if anyone tries to collect it they can be brought before the court on an order to show cause and be held in contempt for attempting to collect in the face of the discharge.
This blog simply contains my thoughts and ruminations on certain subjects. They are thoughts in general and not intended to be taken as legal advice. If anything in this entry piques your interest or seems to apply to your situation please do not hesitate to contact us through our website at http://www.schinzelaw.com/ or directly by telephone at (760) 510-4900.