What is an 'Automatic Stay'

An automatic stay is a provision in United States bankruptcy law that temporarily prevents creditors, collections agencies, government entities and individuals from pursuing debtors for amounts owed. Under Section 362 of the United States Bankruptcy Code, an automatic stay goes into effect the moment a debtor files for bankruptcy. The automatic stay applies to both individuals and businesses, and to all of the chapters of the Bankruptcy Code. The automatic stay does not protect non-debtor entities such as corporate affiliates, corporate officers, codefendants or guarantors. A bankruptcy filing in bad faith will not create an automatic stay.

BREAKING DOWN 'Automatic Stay'

Automatic stay provisions protect the debtor against certain actions from 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. Certain debts, however, such as child support, IRS tax deficiencies and loans from pensions, are not stayed. 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 they are owed. Instead, creditors will receive a proportional share of the bankrupt debtor's limited assets. Creditors who believe they have sufficient grounds can petition the court to lift the automatic stay so they can continue the collection process.

The Length of an Automatic Stay

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

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, no automatic stay will go into effect when a third case is filed, unless a motion is filed with the court and a judge agrees that filing three cases is reasonable for that debtor’s circumstances.

RELATED TERMS
  1. Voluntary Bankruptcy

    Voluntary bankruptcy is a type of bankruptcy where an insolvent ...
  2. Reaffirmation

    Reaffirmation is an agreement made by a debtor to repay some ...
  3. Preferred Creditor

    A preferred creditor is an individual or organization that has ...
  4. Chapter 7

    Chapter 7, known as straight or liquidation bankruptcy, of Title ...
  5. Involuntary Bankruptcy

    An involuntary bankruptcy is a legal proceeding where creditors ...
  6. Notice To Creditors

    The notice to creditors is a public notice usually posted in ...
Related Articles
  1. Taxes

    5 Myths About Personal Bankruptcy

    There are some persistent myths that hover over the process of bankruptcy that are either half-truths or completely false.
  2. Personal Finance

    Should You File for Bankruptcy?

    Find out how to determine whether bankruptcy will help or hurt your financial situation.
  3. Financial Advisor

    Bankruptcy Protection For Your Accounts

    Will the plan assets you've worked hard for be safe if you experience a personal financial crisis?
  4. Personal Finance

    Debt Collection: Know Your Rights

    Learn about the debt collection process so you know how to handle it if it happens to you.
  5. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  6. Personal Finance

    How the debt collection agency business works

    Understanding how the debt collection business works will give you a better chance of coming out ahead if you ever have to tangle with a collection agent.
  7. Investing

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay. Learn about debt- and corporate-entity-based strategies for protecting your assets.
  8. Investing

    3 Companies You Never Thought Would Go Bankrupt (GPRO, NFLX)

    Understand more about company bankruptcy and why a company would file for bankruptcy. Learn about three companies that went from industry leaders to bankruptcy.
  9. Investing

    Buying a House After Bankruptcy? It Is Possible!

    Buying a house after bankruptcy is not impossible. It just takes time to repair your credit score and demonstrate you're a good risk for a mortgage.
RELATED FAQS
  1. What effect did the Bankruptcy Abuse Prevention and Consumer Protection Act of 2 ...

    Credit card companies and banks hate deadbeats who take from their bottom lines. They especially dislike the Chapter 7 bankruptcy ... Read Answer >>
  2. How can a creditor improve its Average Collection Period?

    Read about some of the ways that a business can improve its accounts receivable management practices to shorten its average ... Read Answer >>
  3. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
Trading Center