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Common Concerns & Questions About Bankruptcy

Bankruptcy’s automatic stay: what it can and cannot do (Part 2)

| Apr 27, 2018 | Creditors' Rights |

Filing for bankruptcy, as we discussed previously on our Tyler Texas bankruptcy law blog, provides consumers with protection against their creditors’ efforts to collect on their debts. This protection is known as the automatic stay. While it’s a powerful benefit, its protection is not absolute. Let’s look at some situations where the automatic stay does not trump your creditors’ rights.

One major limitation to the automatic stay is child support. Efforts to collect child support payments are not affected by the automatic stay. Similarly, if you took out a loan from your pension plan or 401(k), filing for bankruptcy will not affect your obligation to make payments on that loan. Your wages may even be garnished for this purpose in spite of bankruptcy’s automatic stay.

The automatic stay can provide some protection from measures the IRS might otherwise take against you, but the agency may still require that you file a return, conduct an audit of your taxes, and seek payment for back taxes owed. If you were found guilty of a crime and ordered by a court to repay funds that you stole or otherwise obtained illegally, the automatic stay can freeze those payments, but it will not interfere with any other aspects of your sentence (e.g., community service hours or prison time). And filing for bankruptcy more than once within a year can also complicate the automatic stay in your second case.

Ultimately, even in cases where the automatic stay does apply, creditors have the right to ask the court to remove it if they can demonstrate that it is not being used as it is intended. A legal professional can help make the argument as to why the injunction should not be lifted in these cases, and can help filers understand what they can realistically expect in the bankruptcy process. This information is not intended as specific legal advice, but only as a general background on bankruptcy and the automatic stay.

Source: Findlaw.com, “The Automatic Stay: Stopping Creditors with Bankruptcy,” accessed on April 23, 2018