What Is “Bankruptcy Protection?”

When a company or celebrity files bankruptcy it is a news-worthy event. The media often states that the company or person has “filed for bankruptcy protection.” But what exactly does this mean?

The federal bankruptcy laws are written to allow the debtor time to reorganize his or her finances. Reorganization would not be possible if creditors are allowed to continue collection actions like repossession, foreclosure, or lawsuits. Consequently, when a debtor files a bankruptcy case, the federal law immediately and automatically stops all collection activity. This provision, called the “automatic stay,” gives the debtor “breathing space” to work with legal counsel, the bankruptcy trustee, creditors, and the court to propose a plan to either repay or discharge debts.

The automatic stay is technically a temporary injunction, issued by the federal bankruptcy judge, and directed at creditors that forbids collection action without prior permission from the court. The automatic stay prohibits creditor contact with the debtor in an effort to collect on a debt, which means collection letters, phone calls, emails, and other harassment must immediately cease. Lawsuits and garnishments must also stop once the bankruptcy case is filed. A violation of the automatic stay is punishable by contempt and enforced by the bankruptcy court.

The automatic stay continues until either the debtor receives a discharge, the case closes, or the stay order is modified. Once the debtor receives a discharge, a new injunction takes the place of the automatic stay, commonly called the “discharge injunction.” The discharge injunction is permanent and does not expire. It prohibits the creditor from collecting from the debtor, which includes lawsuits, garnishments, collection letters, etc.

The automatic stay and the discharge injunction apply to original creditors and third party collectors like collection agencies and attorneys. However, while violation of these orders does not depend on knowledge of the bankruptcy, court punishment usually does. The first thing to do when a violation occurs is to notify the collector of the bankruptcy order and contact your attorney. Knowing violations of a court order will have serious consequences for the collector and any wrongful repossession, garnishment, or seizure will be undone by the court’s authority.

Bankruptcy protection is very powerful. The automatic stay umbrella will immediately shield you from creditor harassment while you restructure your finances, and the discharge injunction will give you peace of mind to enjoy your fresh start. For more information on how you can benefit from bankruptcy protection, contact an experienced bankruptcy attorney.