What Is an Automatic Stay?

An automatic stay is a provision in United States bankruptcy law that temporarily prevents creditors, collection agencies, government entities, and others from pursuing debtors for money that they owe.

Key Takeaways

  • An automatic stay stops creditors from trying to collect debts from a debtor who has filed for bankruptcy until court proceedings are completed.
  • Creditors, collection agencies, and others who violate the automatic stay can be sued by the debtor.
  • Creditors can ask that the court lift the automatic stay if the debtor’s assets are likely to lose significant value before the case is resolved.

How an Automatic Stay Works

Under Section 362 of the United States Bankruptcy Code, an automatic stay goes into effect the moment when a debtor files for bankruptcy. The automatic stay applies to individuals, to businesses, and to all of the chapters of the Bankruptcy Code.

The automatic stay does not apply to non-debtor entities, such as corporate affiliates, corporate officers, co-defendants, or guarantors.

Automatic-stay provisions protect the debtor against certain actions from their creditors, including starting or continuing court proceedings against the debtor; moving to foreclose on a debtor’s property; creating, perfecting, or enforcing a lien against a debtor’s property; and attempting to repossess collateral.

A debtor may sue a creditor who continues to contact them or who attempts to sue them after an automatic stay is in place. The benefits of an automatic stay are often a primary consideration in a debtor’s decision to file for bankruptcy.

Another objective of the automatic stay is to put all creditors on a level playing field and prevent one creditor from seizing a debtor’s assets before others have had the opportunity to do so. Once an automatic stay goes into effect, creditors are unlikely to receive the full amounts that they are owed. Instead, they will receive a proportional share of the bankrupt debtor’s limited assets. Creditors who believe that they have sufficient grounds can petition the court to lift the automatic stay so that they can continue the collection process.

A court may grant relief from an automatic stay “for cause, including the lack of adequate protection of an interest in property...”. That refers to circumstances in which the value of a property or secured collateral may decrease while the bankruptcy case is being resolved. For example, a mortgage holder for a property may be able to collect payments from the person or business that filed for bankruptcy if the property’s value is expected to suffer while the case is in progress.

A stay also may be lifted if the property is not directly owned by the debtor or will not be included in a bankruptcy reorganization.

What Debts Are Exempt from an Automatic Stay?

Certain types of debts, however, are not covered by an automatic stay. Those include child support and alimony payments, as well as money owed as a result of a criminal proceeding. While the Internal Revenue Service (IRS) can’t attempt to collect the debtor’s tax debts or put a lien on their property during an automatic stay, it can seize their tax refund.

The Length of an Automatic Stay

The automatic stay lasts as long as the bankruptcy proceeding continues, and it ceases if the case is dismissed. The length of the stay also depends on whether it applies to collection activity directed toward the debtor personally or toward their property. The length can also vary based on the type of bankruptcy filing, since Chapter 13 bankruptcy cases typically last much longer than those filed under Chapter 7.

Another factor is how many bankruptcy cases the debtor is involved in. Having more than one bankruptcy case pending at the same time is known as serial filings. For instance, some debtors will first file for Chapter 7 bankruptcy and then follow up with a Chapter 13 filing. If a debtor has had one case pending during the previous year and then files a second one, the automatic stay will only last for 30 days in the second case unless the court agrees to extend it. If a debtor has had two cases pending during the previous year, then no automatic stay will go into effect when a third case is filed, unless a motion is filed with the court and unless a judge agrees that filing three cases is reasonable for that debtor’s circumstances.

Example of an Automatic Stay

Aki’s clothing store has been doing poorly for some time, and he fell behind on the mortgage for his shop, his credit card debt, and his loan payments. In total, he owed $170,000 to various creditors. He filed for Chapter 7 bankruptcy, and the court granted him an automatic stay on his debts. Collection agencies, which had been pursuing him, had to stop calling him.

However, his creditors filed for relief from the automatic stay. Aki’s store was located in an up-and-coming neighborhood, and his lenders wanted to take advantage of the appreciation in prices to rent it out to another business or sell it while it was still in presentable condition.

Aki disclosed the state of his finances to the court, and it was clear that he wasn’t in a position to maintain the property. Considering the facts of Aki’s case, the court granted relief from the stay to his creditors, and they were able to repossess the shop.