Automatic stay

Automatic stay is a legal provision in bankruptcy law that temporarily halts actions by creditors, with certain exceptions, to collect debts from a debtor who has declared bankruptcy. Under Section 362 of the United States Bankruptcy Code, an automatic stay is immediately effective upon filing the bankruptcy petition.

Overview

The automatic stay is a powerful tool for debtors to manage their financial situation. It provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation. The automatic stay also stops the bankruptcy case from being dismissed by the court, which would otherwise occur if the debtor did not meet certain requirements.

Scope and Limitations

The automatic stay applies to most collection activities, including legal proceedings, the enforcement of judgments, garnishments, and even telephone calls demanding payment. Creditors receive notice of the stay and must cease their collection activities, or face potential sanctions. In a Chapter 7 bankruptcy, the stay remains in effect until the property is no longer part of the bankruptcy estate. In a Chapter 13 bankruptcy, the stay remains until the debtor receives a discharge, or until the case is dismissed or converted to another chapter.

However, the automatic stay is not absolute. Certain actions are not stayed, such as criminal proceedings, certain family law proceedings, and actions by a governmental unit to enforce its police or regulatory power. In addition, the stay may be lifted by the court upon request by a creditor who can show cause.

Impact on Creditors and Debtors

For creditors, the automatic stay can be a source of frustration, as it prevents them from collecting on their debts. However, it also provides a systematic, equitable distribution of the debtor's assets. For debtors, the automatic stay provides immediate relief from collection activities and gives them a chance to reorganize or discharge their debts.

See Also

• Bankruptcy in the United States
• Chapter 7, Title 11, United States Code
• Chapter 13, Title 11, United States Code