Automatic Stay In Bankruptcy

Regardless of what Chapter of bankruptcy you file for, under 11 U.S.C. Section 362, when you file for bankruptcy, the filing of a bankruptcy petition will act as an automatic stay against your creditors. A stay is an injunction that stops your creditors from seeking enforcement and collecting debts from you, the debtor. An injunction is a court order that compels your creditors to stop what they are doing and let the bankruptcy court sort out your debt situation.

What Does The Stay Apply To?

The stay applies debt claims that arise prior to the date of the bankruptcy filing, but does not apply to any debts that arise thereafter, and thus debts that arise after the bankruptcy filing are enforceable against the debtor. The stay applies to most creditors, but it does not apply to the debtor’s general partners, corporate affiliates, corporate officers, or guarantors.

As a general rule, under 11 U.S.C. Section 362(a) the stay will stop proceedings for the following:

  1. Judgments Against the Debtor. Any judgement against the debtor that was obtained before the bankruptcy was filed (also referred to as prepetition judgments) will be stayed. This includes garnishments, levies, judgment collection remedies, etc. Judgements obtained against the debtor after the bankruptcy filing will not be stayed.
  2. Litigation Against the Debtor. Any litigation that could have been, or was, commenced against the debtor prior to the bankruptcy filing will be stayed. This also includes staying the continuation of any proceeding against the debtor after the bankruptcy filing. This also includes staying any commencement or continuation of a proceeding before the United States Tax Court.
  3. Collection Efforts on Claims that Predate The Bankruptcy. Debts that predate the bankruptcy filing cannot be collected, assessed or recovered from a debtor, and puts a stop to collection calls, demand letters and harassment over unpaid and overdue debts.
  4. Actions to Obtain Possession of the Debtor’s Property. Any action that would result in taking possession or control of the debtor’s property will be stayed. Mortgage foreclosures and seizure of debt collateral, for example, will be stayed.
  5. Liens. Liens arising from claims that predate the bankruptcy filing cannot be created, perfected or enforced against the debtor after the bankruptcy filing date.
  6. Mutual Debts Cannot be Setoff. Any prepetition mutual debt cannot be set off after a bankruptcy filing. This applies to situations where a debtor is in debt to a creditor, but also holds debt from that creditor, and rather than exchange payments, the two debts cancel each other out.

What Does The Automatic Stay Not Apply To?

However, there are certain proceedings that a bankruptcy filing will not stay, and these exceptions are laid out in 11 U.S.C. Section 362(b), and some of these exceptions include:

  • Criminal proceedings against the debtor.
  • Police enforcement actions against the debtor.
  • Government agency enforcement actions against the debtor.
  • Tax audits, notices and demands.
  • Post-bankruptcy filing lawsuits.
  • Domestic support obligations (i.e., child support payments, spousal support payments and maintenance).
  • Perfection of certain interests in property, such as mechanic’s liens.
  • Possession actions premised on an expired lease.
  • HUD foreclosure proceedings and foreclosure proceedings under the Merchant Marine Act.
  • Presentment of checks and other negotiable instruments.
  • Securities related transaction setoffs.

If you are considering bankruptcy or have questions about automatic stays, contact an experienced bankruptcy lawyer at the Hathaway Law Center.

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