An introduction to the automatic stay in bankruptcy

An introduction to the automatic stay in bankruptcy

The broad cessation of collection activity against the debtor is a huge relief from financial pressure.

One of the strongest benefits of filing a petition for bankruptcy is the immediate automatic stay triggered by the filing. The automatic stay is an order of the U.S. Bankruptcy Court that all collection activity on debts that arose before the bankruptcy filing immediately cease because of the bankruptcy filing.

The automatic stay gives the debtor a chance to catch its breath, so to speak. Debt collectors must communicate with the debtor’s lawyer during the stay instead of with the debtor directly.

In most situations, the stay lasts the length of the bankruptcy proceeding.

What kinds of collection activity does the stay reach?

The automatic stay is extremely broad and may include:

• Lawsuits: Lawsuits and other legal proceedings to collect on debts (including some taxes) existing before the bankruptcy filing may not be started and those already in process must cease.
• Judgments: Efforts to enforce or collect against a judgment received before the bankruptcy filing are not allowed.
• Liens: Enforcement or creation of any liens against property of the debtor may not be started or continued.
• Collection: Efforts to collect on claims that pre-existed the bankruptcy filing must stop, including phone calls, mail and electronic communication to the debtor. This covers a wide variety of debts such as credit cards and medical bills.
• Setoffs: Setoffs between debts owed to the debtor with debts the debtor owes must not begin or continue.
• Repossession: During the stay, repossession efforts against vehicles like cars, motorcycles and boats normally must stop.
• Garnishment: Money being deducted from the debtor’s wages to repay debt must in most circumstances cease.
• Foreclosure: The automatic stay in most situations stops a foreclosure in process and one must not be filed during the stay.
• And others

Are there exceptions to the stay?

The stay does not stop certain kinds of collection activity:

• Criminal proceedings
• Many civil proceedings related to family law like those involving paternity, domestic support, child custody, divorce (except regarding property division that is part of the bankruptcy estate) or domestic violence
• Certain government tax assessment efforts
• Possession of commercial property if the debtor’s lease of it expired before the bankruptcy filing
• Possession of residential premises in certain specific situations
• Payroll withholding to repay loans taken from particular retirement accounts
• And others

When can creditors get relief from the automatic stay?

In certain circumstances, a creditor may ask the court for relief from the stay, meaning being allowed to engage in collection activity despite the stay. For example, a lender seeking foreclosure on a home or other real estate may ask for leave to proceed with the process.

The automatic stay is an extremely complicated area of bankruptcy law, especially as it impacts debts related to complex investments and financial instruments. a lawyer can answer questions about how the stay will impact a debtor’s unique circumstances.

The lawyers at Nowack & Olson PLLC with four offices in South Florida represent debtors in foreclosure and bankruptcy.