Bankruptcy and the Automatic Stay

When somebody files a bankruptcy petition, all efforts to collect debt have to stop unless they fit within one of the carefully worded exceptions in the bankruptcy statute. Here’s how the automatic stay works  and how the exceptions work  in the context of bankruptcy and divorce.

Debt collection efforts must stop on the filing of the bankruptcy petition, even if the creditor doesn’t even know yet that the bankruptcy is filed. Actually, that’s a bit of an overstatement. The debt collection efforts can continue without penalty until the creditor gets notice of the filing; it’s just that they won’t do any good because the court will reverse them after the fact. This means, for example, that a lawsuit to foreclose on property owned by a debtor will be stayed, as will a lawsuit to collect a debt.

There are several exceptions to the automatic stay. The most important for most claimants in divorce are the two exceptions described in Section 362(b)(2) of the bankruptcy statute. The first allows actions to continue for establishing paternity or to set up payment of alimony or support. The second allows actions to continue to collect alimony, maintenance, or support from property that’s not part of the bankruptcy estate. 

Establishing Support Orders

If you or your spouse (or former spouse) are involved in an action to establish paternity or to set support payments (as opposed to an action to collect them), the automatic stay will have no effect on your case, and you can proceed without worrying much about the automatic stay. Because the limitations on collections, you may not get much cash for your efforts in the short run, but the obligation will at least begin to accrue.

Collecting Support

Even after a bankruptcy petition is filed and the automatic stay is in effect, an action can continue to collect alimony, maintenance, and/or child support from property that is not part of the bankruptcy estate. This is less helpful than it might seem, because the definition of the property in the estate is so broad. This is one of those areas where the kind of bankruptcy makes a real difference. If the filing is a Chapter 7 petition, the income the debtor earns after the filing of the petition (called “post-petition earnings”) is not part of the estate and is therefore available for collection of alimony, maintenance, and support. If the filing is a Chapter 13 petition, on the other hand, the post-petition earnings of the debtor are part of the estate (because they’re needed to pay claims) and not available without the court’s specific order for payment of arrearages of support while the stay is in effect.

To make it painfully clear for claimants, this means that if you’re owed back child support from a debtor who files Chapter 13 bankruptcy, your efforts to collect the money the debtor owes you may have to stop while the bankruptcy is pending. You have the satisfaction of knowing they can’t be discharged, so you’ll be able to get your money eventually, but if the bankruptcy court won’t lift the stay you’ll have to wait a while for the cash.

Print Friendly