Many myths exist around personal bankruptcies. One of these myths is that creditors can continue to try to collect on debts once you file for bankruptcy. The truth is that the court issues an automatic stay when you file your petition for relief.

The automatic stay prevents creditors from being able to make any collection attempts, including phone calls, letters, in-person visits and electronic methods, once the order is issued. According to the United States Bankruptcy Code Section 362, this protection goes into effect the moment the petition is made with the court. If the creditor still attempts to collect, they can face severe penalties.

Benefit to the filer

Having bill collectors constantly sending demands for payments and calling you all the time can become unnerving. In some cases, these attempts border on harassment. The mental impact can be great. Being able to get these to stop can often give you some measure of peace, even though you know you still owe the money.

Benefit to creditors

The primary benefit to the creditors involved in the bankruptcy is that the automatic stay prevents any one entity from trying to gain an advantage over the others. All payments on debts will go through the bankruptcy trustee, so the accounts are all paid in accordance with the applicable laws. This is important because the creditors aren’t likely going to receive the full amount that is due. When the bankruptcy is discharged, the balances remaining on the debts are forgiven.

Limitations on automatic stays

In the majority of cases, the automatic stay lasts the entire length of the bankruptcy. There are some exceptions to this. One occurs when a creditor is able to prove that the debt was the result of you defrauding them. For example, if you ran up a credit card account just prior to the filing, the creditor might claim that you did this knowing that you were going to file so you could get as much money out of them as possible.

The automatic stay shouldn’t be the only reason you file for bankruptcy. The reason to do this should be based on your need to regain control of your finances. It is imperative that you look at the comprehensive situation before you file. This gives you the opportunity to ensure that you can meet the requirements for your case, and that you are prepared for the entire process.

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