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The Automatic Stay

In the moment when a voluntary Bankruptcy case is filed under any Chapter of the Bankruptcy Code the automatic stay goes into effect. What is this immediate benefit to a debtor? Why does the law provide for it? How far reaching is it?

The stay prohibits any act to obtain money or other property, whether real estate or personal property from a debtor. All law suits must stop. No creditor may take any action to contact a debtor or others even to ask the debtor to pay. The phone calls , letters law suits and repossession efforts must end. A creditor or those acting at the creditors request who know of the stay and ignore it may be held in contempt of court. Property seized from a debtor such as repossessed autos, tools, machinery, equipment, money in bank accounts and other items must be returned. Most importantly, the stay stops foreclosures and sheriff’s sales will result in the loss of a debtor’s home or other real estate.

The automatic stay does NOT stop criminal prosecutions against debtors who have violated the criminal or motor vehicle laws. The stay does not affect proceedings to require or enforce the payment of child support, alimony or other types of divorce proceedings except that proceedings to determine how to divide up property acquired during a marriage (equitable distribution) may require the permission of the bankruptcy court.

The purpose of the stay is to give debtors some breathing room so they can decide in Chapter 13 and Chapter 11 cases how to reorganize their finances. In Chapter 7 cases it protects debtors’ exempt property and gives the trustee the chance to see what assets are in the debtors’ hands without interference from creditors. The trustee and debtor may require property to be returned to the debtor or recovered by the trustee from creditors under certain circumstances.

The stay is the equivalent of an injunction. An injunction is a court order prohibiting or commanding some action.

Creditors may file a motion with the Bankruptcy Court to obtain permission to continue law suits to recover money or take property from the debtor or trustee. This is called obtaining relief from the automatic stay. Home owners who have filed bankruptcy cases may be required to protect their homes by resuming mortgage ,tax and insurance payments and to file a plan that will protect their mortgage holder’s interest in the property. This may be required by the court. The idea is to adequately protect the creditor so the debt does not increase and the value of the property does not decrease.