June 18, 2010

What is an Automatic Stay?

Posted in Bankruptcy tagged , at 10:32 am by demetriagraves

Many of my clients who are considering bankruptcy want to know if the collection calls will stop once bankruptcy has been filled. The answer is yes because of the provision for an automatic stay under the U.S. Bankruptcy Code. So what is an automatic stay? It’s an injunction issued automatically upon the filing of a bankruptcy case which prohibits collection actions against the debtor, the debtor’s property or the property of the estate.

The message of the automatic stay is to say Stop! To virtually all of a debtor’s creditors, secured and unsecured, when a petition under any chapter of the Bankruptcy Code has been filed by or against the debtor. The automatic stay is the bankruptcy equivalent of a temporary injunction against virtually all creditor activity that might have the effect of advancing the creditor’s interest at the expense of the debtor or property of the debtor’s estate. The automatic stay provides the debtor immediate calm amidst the storm of financial difficulties. As noted in the relevant Senate Report:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy. Notes of Committee on the Judiciary, Senate Report No. 95-989
To explain this further, a creditor with a claim that arose before commencement of the bankruptcy case cannot contact the debtor requesting or demanding payment, cannot request from the debtor security for existing unsecured or under secured debt, cannot initiate a lawsuit against the debtor or pursue litigation activities in a pending lawsuit against the debtor, cannot attempt to enforce a judgment against the debtor and must act to stop enforcement activities that are already in motion (e.g. notify a sheriff to stop a wage garnishment or to refrain from a scheduled execution sale), cannot perfect a lien against property of the estate, cannot repossess collateral that is property of the estate, and cannot initiate or pursue non-judicial or judicial foreclosure against property of the estate. This debtor protection is truly automatic. No hearing is held, no judge’s signature required. It is invoked simply by the stamp of the bankruptcy clerk’s time clock when a petition is presented for filing. Creditors are bound by the automatic stay.
The automatic stay gives the debtor protection from his creditors, subject to the oversight of the bankruptcy judge, and brings all of the debtor’s assets and creditors into the same forum, the bankruptcy court, where the rights of all concerned can be balanced.

The 2005 amendments to the Bankruptcy Code instituted limitations on the duration of the stay in the case of repeat filers; that is debtors who had a prior case pending in the last year which was dismissed get a stay of 30 days, debtors with two or more cases pending in the past years but dismissed get no stay at all. The debtor in those situations must seek a stay from the court in order to have the protection of the automatic stay.

The automatic stay is temporary. It terminates automatically upon the occurrence of specified events. Also, upon an appropriate showing in a noticed hearing in bankruptcy court, creditors may obtain relief from the stay that either annuls, terminates, or modifies the stay, or conditions continuance of the stay upon certain events, such as interim payments by the debtor to the secured creditor. A secured creditor may seek relief from the stay in order to pursue its state law rights against the collateral or may seek relief from the stay as a way to force a debtor to make interim payments to the secured creditor as a condition to the stay remaining in effect.

If you believe you may be headed for a bankruptcy, please don’t hesitate to get the right advice from an experienced bankruptcy attorney. I offer an free confidential initial consultation where you can get all your questions answered and discuss the best way to move forward in your particular circumstances.

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