Understanding the Automatic Stay: Chapter 7 Versus Chapter 13 Bankruptcy

For anyone facing financial hardship, the decision to file for bankruptcy, whether Chapter 7 or Chapter 13, is often made to stop immediate collection actions. The powerful tool that provides this immediate relief is the Automatic Stay. However, its protection is not absolute, especially when it comes to keeping a secured asset like a car when you are behind on payments.

Understanding how the Automatic Stay interacts with your choice of bankruptcy chapter is critical to avoiding costly mistakes.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Listen: The Professor’s Audio Briefing.

Updated on October 26, 2025.

Key Takeaways on the Automatic Stay and Secured Debt

• Source of Authority: The Automatic Stay is codified in Section 362 of the U.S. Bankruptcy Code and goes into effect immediately upon filing.
• Broad Protection: The stay temporarily halts most civil lawsuits, wage garnishments, and collection actions, including repossession and foreclosure.
• Secured Debt Crux: For secured assets (like cars or homes) where you are behind on payments, the Automatic Stay’s protection in Chapter 7 is only temporary and does not offer a solution to cure the default.
• The Chapter 13 Solution: Chapter 13 bankruptcy is the only viable legal option to keep a secured asset if you are in default, as it allows you to pay off the missed payments (arrearages) over a 3-to-5-year plan.
• Correcting Errors: A Chapter 7 case that was filed incorrectly can often be converted to a Chapter 13 case by motion, allowing the debtor to save secured property from repossession.

What is the Automatic Stay?

The Automatic Stay is referenced in Section 362 of the U.S. Bankruptcy Code. The moment a bankruptcy petition is filed with the court, the Automatic Stay automatically goes into effect. No separate motion or judge’s order is required. The automatic stay stops most collection efforts against the debtor, including:

Most civil lawsuits (though exceptions exist, such as criminal proceedings and certain family court actions like child support or alimony enforcement).

• Wage garnishments.
• Foreclosure proceedings on a home.
• Repossession of a vehicle or other secured property.

You can learn more about wage garnishments after bankruptcy has been filed via this link.

The Critical Difference: Automatic Stay and Secured Debt

The confusion over the Automatic Stay often arises when a debtor wants to keep a secured asset like a car with a loan or a house with a mortgage, but is behind on the payments.

Key Rule to Note: While the Automatic Stay temporarily stops a creditor from repossessing a car, the protection it offers in a Chapter 7 case is short-lived if the debtor is in default.

The Chapter 7 Limitation

Chapter 7 bankruptcy (Liquidation)  is designed to discharge unsecured debt quickly. It does not provide the option for a debtor to “catch up” on missed payments (arrearages) for secured property over time.

If you are current on your car loan, Chapter 7 allows you to reaffirm the debt or redeem the car (pay its fair market value in a lump sum).

Reaffirmation Agreements: Keeping Your Car Post-Bankruptcy

If you are behind on payments, Chapter 7 will NOT allow curing the default. The creditor will quickly file a Motion for Relief from the Automatic Stay with the court. If granted, which is likely since Chapter 7 provides no legal path to cure the default. Once the motion is granted, the creditor can repossess the car.

The Chapter 13 Solution

Chapter 13 bankruptcy (Reorganization or “Wage Earner’s Plan”)  is the only viable option if your goal is to keep a secured asset and cure a default on the loan, whether it’s a car loan or a mortgage.

Chapter 13 requires the debtor to propose a repayment plan (typically 36 to 60 months) to the court. The plan can be used to pay off the arrearages(the missed payments) over the life of the plan while maintaining regular monthly payments going forward.

The Automatic Stay remains in effect, preventing repossession as long as the debtor keeps up with the payments required by the confirmed Chapter 13 plan.

Case Example: Converting from Chapter 7 to Chapter 13

Consider the situation of Mandy and Rick, who faced a looming repossession after filing Chapter 7 because they were behind on their car payments. They correctly invoked the Automatic Stay initially, but found that Chapter 7 didn’t provide a long-term fix to keep their car.

Because they were behind on payments, the lender filed a Motion for Relief from Stay. Since Chapter 7 won’t protect them, what options do they have?

The Solution: Mandy and Rick can file a motion with the bankruptcy court to convert their Chapter 7 case to a Chapter 13 case.

The Benefit: If the conversion is granted, they can then propose a Chapter 13 repayment plan. This plan will allow them to save their vehicle by dedicating their resources to catch up on the missed car payments (the arrearages) over the next three to five years.

Conversion from Chapter 7 to Chapter 13 (or vice-versa) is a common and often done when Chapter 7 doesn’t provide the protection that the debtor is seeking.

The Professor’s Take: If an asset like a car or house is secured by a loan, and you are currently in default but wish to keep the property, Chapter 13 is your only option. The Automatic Stay will prevent the creditor from moving forward with the lawsuit or collection action as long as the plan payments are being made.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Updated initially on December 17, 2024.