As soon as you file bankruptcy, an action called an "automatic stay" goes into effect. The automatic stay is sort of like a legal shield, offering protection against actions that a creditor might try to take against you. It doesn't protect against everything, but it does provide a bubble within which a person may carry out their bankruptcy proceedings in relative safety.
How does an automatic stay protect you?
An automatic stay provides protection from many, but not all, actions against a debtor. For instance, new lawsuits against the debtor are blocked, as are utility shutdowns. Actions to obtain the debtor's property are blocked, in most instances. Creditors cannot create or enforce a lien on your property. They can't engage in a set-off of debt (if you owe them money and they owe you money, a set-off balances the books and creates one single debt to be paid.)
Utility companies are held back from shutting off service for 20 days. Foreclosures and evictions become a lot more difficult. (Though they can still occur - see the section below for more information.) If you have received an accidental overpayment of benefits, the agency that overpaid cannot move to collect their overpayment back. And finally, wage garnishments stop as soon as you file bankruptcy. There are a lot of legal and financial troubles that go away when you file.
What are the limits of an automatic stay?
Still, bankruptcy serves a purpose - it's meant to help well-meaning people clean up their financial circumstances. Some less-well-meaning people file regularly, as a way to escape consequences. Because of that, U.S. bankruptcy law got a major overhaul in 2005 to offer some protections to creditors. The IRS, in particular, is still very free to pursue taxes owed to them. While they can't put a lien on your property, they can audit you, issue a tax deficiency notice, or demand a tax return. If a creditor has an interest in a single real estate asset - for instance, a mortgage company that holds the loan on your house - they can take action against you. In this case, the debtor has to draw up a reasonable payment plan and propose it to the creditor or pay the interest value of the property.
Landlords also have some protections. If a landlord began eviction proceedings before you filed bankruptcy, those proceedings can continue. Likewise, they can evict you if they can illustrate that you are using illegal substances, or that you are "endangering" the property. If there are support actions against you - that is, if you're paying alimony or child support - you can still be sued to collect those things. If you're being charged with some kind of financial crime, the "debt" part of the lawsuit will be split off from the "criminal" part of the lawsuit, but the criminal part will still hold. You might still have to do community service for your insider trading or your bad check. If you took loans out of your pension - like an advance on your IRA - money can still be withheld to pay those back. Bankruptcy protects from a lot of things, but it doesn't guarantee an easy out.
