Don’t take for granted how quickly and thoroughly filing bankruptcy protects you, your money, and everything else you own.  

Extraordinary Protection

The automatic stay is amazing.

Every one of the 50 states has a complicated set of laws and procedures that dictate how and when a creditor can pursue a debtor. These laws and procedures determine in detail what it takes to sue and get a judgment, to garnish wages and bank accounts, to repossess vehicles and other collateral, and to take any other action by which debts can be collected.

But even if a creditor is following your state’s collection laws to the letter, the minute you file a bankruptcy case those laws go out the window. The creditor’s collection effort against you—whether it involves a pending lawsuit, a court order requiring you to appear for a judgment debtor hearing, a garnishment order on your bank to give the money in your account to your creditor, or anything like this—all comes to a screeching halt. The lawsuit stops, the court orders are made unenforceable.

That’s powerful protection.

The Sources of that Power

In our federalist system of government, the states get to make most of the rules about the creation and collection of debts. But there are two big reasons that a simple bankruptcy filing can trump the entire system of these state rules.

First, the U.S. Constitution’s Supremacy Clause establishes that the federal constitution and federal law take precedence over state constitutions and laws.  It says: “This Constitution, and the laws of the United States which shall be made in pursuance thereof,… shall be the supreme law of the land; and the judges in every state shall be bound thereby…  .” (See Article VI, Section 2.)

Second, from the beginning the U.S. Constitution gave Congress the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.”  (See Article I, Section 8, Clause 4.) This means that states can’t create bankruptcy laws, only the federal government can.

In combination, these two parts of the U.S. Constitution mean that federal bankruptcy law trumps state collection law. It gives power to the provision in the federal bankruptcy law that says that a bankruptcy filing stops all state law collection efforts.

What the Automatic Stay Stops

A bankruptcy “petition… operates as a stay, applicable to all entities.” (See Section 362(a) of the Bankruptcy Code.)

This means that the very act of filing bankruptcy serves to stop all creditors. It stops them from:

• Suing you, or continuing with a previously filed lawsuit 
• Enforcing a previously obtained judgment against you, by garnishing wages or bank accounts, or by any of the many ways judgments can be enforced
• Repossessing collateral
• Seizing your property in payment of a debt
• Creating a lien against your property, by recording a judgment or otherwise
• Enforcing a lien, by foreclosing on it or seizing the property encumbered by the lien
• In any way acting to collect a debt

Timing

The automatic stay—the stopping of all collection actions—goes into effect immediately upon the filing of the bankruptcy petition. Its effectiveness does not require a judge’s order, so there’s no such delay involved. Its immediate effectiveness also does not turn on how your creditors feel about it (although they can object later). The automatic stay is indeed automatic.  

Conclusion

Thanks to the U.S. Constitution, and thanks to the U. S. Bankruptcy Code authorized by the Constitution, the automatic stay immediately stops virtually all collection efforts against you, no matter that those collection efforts were completely following the law otherwise.

This easy but thorough defeat of collection laws for the purpose of giving you relief from your creditors IS quite extraordinary.