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.

Understanding 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.

Key Takeaways

  • Automatic stay provisions protects debtors from creditors by freezing their claims on property, collateral, and assets until bankruptcy court proceedings are completed.
  • Once an automatic stay goes into effect, creditors are unlikely to receive the full amounts they are owed.
  • The length of an automatic stay depends on various factors, including duration of the bankruptcy court case and type of filing.

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.

Relief from an automatic stay is granted to creditors under three instances. The court may grant relief from automatic stay "for cause, including the lack of adequate protection of an interest in property..."

Quite simply, this relates to circumstances in which the value of a property or secured collateral may decrease while the bankruptcy case is being resolved.

A bankruptcy filing in bad faith will not create an automatic stay.

For example, a mortgage creditor for property may be liable to receive monthly payments from the person or business that filed for bankruptcy, if the property's value is expected or will suffer while the case is in progress.

The second instance in which relief may be granted is if the property is not directly owned by the property or if the property will not be included in a bankruptcy reorganization.

The final type of case that may qualify for relief is single asset real estate bankruptcy cases which involve less than $4 million in secured debt.

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.

Example of Automatic Stay

Aki's business went under the water and he fell behind on the mortgage for his shop, credit card debt and loan payments. In total, he owed $170,000 to various creditors. He filed for Chapter 7 bankruptcy and the court granted automatic stay to him on his debts. Collection agencies, which had been pursuing him, stopped harassing him.

However, his creditors filed for relief from automatic stay in his case. Aki's clothing store was situated in a hot real estate market and his lenders wanted to take advantage of the appreciation in prices to rent it out to another business owner or sell the store.

Aki disclosed the state of his finances to the court and they were not good. 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 and other secured credit.