When a bankruptcy case is filed with the court, an “automatic stay” kicks in which protects you from most debt collection efforts. The automatic stay is temporary and applies while the bankruptcy case is pending. In most cases, the automatic stay protections are them replaced by the permanent protections offered by the bankruptcy discharge.
But even before you file your bankruptcy case, just knowing that you intend to file for bankruptcy is often enough to deter most creditors from attempting to collect against you for your debts. Although technically and legally most are allowed to continue to make collection efforts, most will stop once they can confirm that you have indeed hired an attorney to file for bankruptcy – as a pragmatic matter.
Why would your creditor stop pursuing you for a debt if they are legally entitled to pursue you?
Let’s say I’m a collection agent for Acme Collections, LLC. I’ve been attempting to collect a $500 debt from you for the past 6 months to no avail. Seeing no other recourse, I’m thinking about filing a lawsuit against you in small claims court to recover the $500. Yes, it will cost my company money to file the lawsuit – my company will have to pay court filing fees, pay for an attorney to file the paperwork, and other costs incidental to the lawsuit – but most (if not all) of those costs can be added to the bill I’m trying to collect. So what may have started out as a $500 debt will become a $1300 debt if my company is successful in obtaining a judgment against you.
But what if you tell me that you’ve retained an attorney to file for bankruptcy? I call your attorney and confirm that yes, you did in fact hire that attorney. The bankruptcy case isn’t filed yet, so technically, my company can still file a lawsuit against you. But should we?
Well, probably not. My company is already short the $500 you owe it. If it invests the time and money into filing a lawsuit – even if my company prevails and gets a judgment against you – that judgment can be discharged in the bankruptcy case. My company’s only hope is to rush through the lawsuit, garnish as much of your wages as it can before you file for bankruptcy, and hope that it doesn’t have to turn over the money as a recoverable preference. Not at all likely.
So without even filing for bankruptcy, just the fact that you have hired an attorney to begin the process of filing for bankruptcy is enough to deter my company from filing a lawsuit against you. In all likelihood, my company will sit back and wait for its notice that the bankruptcy case has been filed.
So what’s the lesson to be learned here? If you’re planning to file for bankruptcy and you’ve hired an attorney – make sure your creditors know it – particularly the ones who haven’t yet invested the time or money to file a lawsuit against you. Don’t ignore phone calls. Make sure that you always refer your creditors to your bankruptcy attorney.