The “Automatic Stay” in Chapter 7 and Chapter 13

Chapter 7 provides protection from creditor collections. Chapter 13 protects you longer, if needed.

The automatic stay is one of the strongest powers given to you when you file a bankruptcy case. That’s the name of the federal law that stops virtually all attempts by creditors to collect their debts against you, your money, and your property as of the moment your bankruptcy case is filed.

The automatic stay stops creditors essentially the same whether you file a Chapter 7 or Chapter 13 case. The big difference is how long this protection lasts.

The “Automatic Stay” in Chapter 7 “Straight Bankruptcy”

The benefits of the automatic stay last as long as your Chapter 7 case lasts—usually about three months or so. In many situations, that’s just long enough. By that time the debts that you want to legally write off (“discharge”) are indeed discharged. The bankruptcy judge signs the discharge order just before the end of the case. After that point those creditors can no longer pursue you or your assets since you no longer owe the debts. So you no longer need the automatic stay for your protection.

However, you may have some other debts which you would continue to owe after the completion of your case. Those debts are owed either 1) voluntarily, such as a vehicle loan on a vehicle you are keeping, or 2) as a matter of law, such as a recent unpaid income tax obligation, because it is a type of debt that can’t be discharged.

Either way you may not need protection from these kinds of creditors beyond the length of a Chapter 7 case. You could enter into a “reaffirmation” agreement with the vehicle creditor, purposely excluding its debt from the discharge of your other debts so that you can keep the vehicle and continue making the payments. Or if you owe recent income taxes, then before your Chapter 7 case is finished you may be able to enter into a reasonable monthly installment payment plan with the IRS or state tax authority. Either way you would not need further protection from the creditor as long as you did whatever you agreed to do.

The “Automatic Stay” under Chapter 13 “Adjustment of Debts”

The automatic stay protection under Chapter 13 usually lasts so much longer than under Chapter 7 because a Chapter 13 case lasts so much longer—3 to 5 years instead of about 3 months. This can creates some significant advantages with certain kinds of debts where you need more time, and need protection during that extended time.

The two examples above—the vehicle loan and the recent tax debt—demonstrate how this works.

If you fall behind on a vehicle loan and had no way to bring it current within a month or two after filing a Chapter 7 bankruptcy, most creditors would not allow you to keep the vehicle. In contrast, under Chapter 13 you’d likely have several years to bring the account current, regardless whether the creditor approved of this. In fact in some situations you would not need to catch up the missed payments at all. And as long as you made your payments as required by your court-approved plan, you would be protected from the creditor throughout this time.

As for a debt of recent income taxes, you would have to pay them under either Chapter 7 or Chapter 13. But Chapter 13 would likely give you more time and more flexibility to pay that tax. You would likely be able to delay paying the IRS or state anything for a number of months while you paid other debts that were even more time-pressing, such as the arrearage on a home mortgage or child support—as long as you paid the taxes off within 5 years. Plus most of the time you would not need to pay any ongoing tax penalties or interest, saving you a lot of money. Again, throughout this time you’d be protected from any collection action by the IRS or state through the continuous automatic stay.

Conclusion

So, the automatic stay stops creditor collections immediately when either a Chapter 7 or Chapter 13 case is filed. The relatively short life of the automatic stay in Chapter 7 is sufficient either if you don’t still owe any debts when the case is done, or if you would be able to make workable arrangements to pay any that you do still owe. But if you need automatic stay protection to last longer, then Chapter 13 would likely give you that protection so that you’d have much more time and more flexibility for taking care of special creditors.