The Automatic Stay is an Order from the Federal Bankruptcy Court requiring that all debt collection actions against a person or business that has filed for bankruptcy protection be suspended or terminated as of the date of filing. The court ordered stay is entered automatically in all bankruptcy cases unless some limited statutory exceptions apply. The automatic stay is a type of injunction or formal command by the court that prohibits any act intended to collect a debt or recover a claim against the debtor that arose before the bankruptcy case was filed.
The automatic stay is governed by 11 USC §362, a lengthy part of the bankruptcy code that details its provisions. This important statute prohibits the taking of just about any type of action that improves or advances the position of a creditor after the case has been filed, including but not limited to:
- The commencement or continuation of any judicial, administrative or other process against the debtor;
- The enforcement of a judgment that was obtained before the bankruptcy was filed;
- Any act to take possession or control of an asset of the debtor or the bankruptcy estate;
- Any action to create, improve, complete or enforce any lien against an asset of the debtor or the bankruptcy estate; or,
- The setoff of any debt owing to the debtor that arose before the bankruptcy case was filed.
The automatic stay is intended to provide time for the debtor to reorganize or the bankruptcy trustee to sort out the assets and liabilities of the creditors without interference.
The automatic stay does not stop a criminal proceeding against the debtor. It does not prevent the commencement or continuation of most family court matters or other special proceedings such as:
- An action to establish paternity;
- An action to establish or modify an order for domestic support obligations;
- A proceeding concerning child custody or visitation;
- An action to dissolve a marriage (except for the division of property);
- A proceeding regarding domestic violence;
- Actions for the collection of domestic support obligations (when property of the estate is not involved);
- The withholding of income for the payment of a domestic support obligation;
- The withholding, suspension or restriction of a driver’s license, professional or occupational license, or recreational license under state law to enforce the payment of a domestic support obligation.
There are some other, less common exceptions that apply in very specialized situations generally related to the police powers of the government to enforce laws or regulate commercial activity.
The 2005 bankruptcy code revisions contained some important new provisions that limit the power of the automatic stay. In order to prevent repeated bankruptcy filings, when a bankruptcy case has been dismissed once within one year, the stay only lasts for the debtor for a period of 30 days unless the court agrees to extend it for good cause. If there have been two bankruptcy cases dismissed within one year, there is no automatic stay at all for the debtor.
Because bankruptcy has become very technical and a case can be dismissed for many reasons, the possible loss of the automatic stay makes it particularly important to get things right when the bankruptcy is filed. This is a very good reason to hire a competent bankruptcy lawyer to help you.
The automatic stay is a very powerful court order that gives the debtor a breather and stops creditors in their tracks. It can stop a wage garnishment, a tax levy or even the foreclosure sale of a home or other property. If the bankruptcy is properly filed, the automatic stay will give the debtor a second chance to keep their home and protect their income. The stay does not last forever. It can be lifted by the court to allow a foreclosure to go forward or a car to be repossessed to protect a secured claim by a creditor. However, when it is possible for the debtor to bring a defaulted home or car loan current, the automatic stay is an important ally for a debtor in bankruptcy when a financial reorganization is possible.