An Automatic Stay is when you file a bankruptcy case creating one of the most powerful tools in bankruptcy—the “automatic stay.” This protective order automatically goes into effect the instant Northwest Debt Relief Law Firm files your case at the bankruptcy court and “stays”—which means stops—all collection activity against you and anything you own.
What Creditors Can’t Do
The Bankruptcy Code includes a list of what creditors cannot do because of the “automatic stay.” Focusing on those applicable to the IRS/state, creditors can’t:
start or continue a lawsuit or administrative proceeding to recover your debt
take possession or exercise control over your property
create or enforce a lien against your property
collect any debt that exists as of the time your bankruptcy is filed
How long does the automatic stay protect me from creditors?
The automatic stay is in effect until your bankruptcy closes. It covers more debt collection than the discharge. Student loans, some back taxes, fines and domestic support obligations are not covered by the discharge. The automatic stay covers student loans and back taxes. Child support actions are not covered by the automatic stay. Fines are not covered either. The IRS can continue a tax audit without violating the stay, but cannot try to collect from you.
A creditor can ask the court to “modify the automatic stay”. If they persuade the court they have a good reason to continue debt collection, the stay is modified only for that one creditor. Usually that means a car company or mortgage company can continue foreclosure or repossession if you are not keeping up on the payments. They can modify the stay in as little as a month.
As Applied to the IRS/State
Income taxes are not treated like most debts as to their discharge (legal write-off) in bankruptcy. Taxes are not discharged unless they meet a series of conditions. But the IRS and state tax agencies ARE in most respects treated the same as other creditors when it comes to the “automatic stay.”
The Bankruptcy Code says that the “automatic stay” “operates as a stay, applicable to all entities.” (Section 362(a) of the U.S. Bankruptcy Code.) So are the IRS and state tax agencies “entities”? The Code defines an “entity” to include a “governmental unit.” (See Section 101(15).) So the IRS and all tax-collecting “governmental units” are indeed governed by the “automatic stay.”
If the IRS/State Tries to Collect Anyway
Just like any other creditors, the IRS and state tax agencies act illegally if they violate the “automatic stay” by continuing to collect on a debt or taking any other of the forbidden actions.
If you are “injured by any willful violation of [the automatic] stay… [you] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” against the IRS/state. (See Section 362(k).) The truth is that the IRS and various state tax agencies have violated the “automatic stay” on occasion. And they’ve had to literally pay the consequences. They now tend to follow the law and respect the “automatic stay” appropriately.
Special Exceptions to the “Automatic Stay” for “Governmental Units”
The IRS and state tax agencies do have some specialized exceptions—things they can continue doing in spite of your bankruptcy filing. (See Section 362(b)(9).) But these are generally sensible exceptions, applying more to the determination of a tax amount than to its collection.
The tax agencies can:
demand that you file your tax returns
make an assessment of the tax and tell you how much you owe
do an audit to figure out the amount you owe
They cannot take any actions to force you pay the tax.
Schedule a Free Consultation with Your Tacoma Bankruptcy Attorney
When it comes time to file for bankruptcy, you need a compassionate and skilled attorney who will be able to guide you through the process as cleanly as possible. Northwest Debt Relief Law Firm, we can help you with filing for Chapter 7, Chapter 11, and Chapter 13 bankruptcy in Washington State. We will be there every step of the way to help navigate you through the often-complex and difficult bankruptcy process.
Give us a call at (253) 780-8008 to schedule a free consultation with one of our bankruptcy attorneys. If you have any other questions about bankruptcy, one of our attorneys will be more than happy to offer advice on your particular situation.