What Is The Automatic Stay And How Does It Work?

The instant a bankruptcy is filed, a “stay” usually goes into effect, restraining creditors (those owed money or property) from taking certain actions against the debtor (the person or entity that filed for bankruptcy) or against “property of the estate.”  This stay is “automatic” as it happens as a function of the law, without any further action required on the part of the debtor or his/her attorney.  The stay provisions of the Bankruptcy Code are found at 11 U.S.C. § 362.  The scope of the “Property of the estate” protected by the automatic stay is very broad, encompassing all of the debtor’s property and rights to property, and the Bankruptcy Code at 11 U.S.C. § 541 defines what is and is not property of the estate. 

Examples of actions that creditors are usually automatically prevented from taking, unless the bankruptcy court orders otherwise, include: filing or continuing a lawsuit to collect a debt; 

  • filing or continuing a lawsuit to collect a debt; 
  • foreclosures where the debtor owns the property being foreclosed on or is a borrower under the loan documents that form the basis of the foreclosure; 
  • repossessions of personal property (e.g. cars, boats, and other movable collateral)  
  • wage garnishment; and 
  • execution on a judgment previously entered.

However, not all actions are halted by the automatic stay.  Examples of actions that a bankruptcy filing does not automatically stop are: 

  • criminal actions; 
  • many family law actions, including those to establish paternity, for divorce, or concerning child custody or visitation.  

Also, there are special rules that apply if the party filing for bankruptcy previously filed for bankruptcy within the year prior or if the bankruptcy court finds that the bankruptcy filing was part of a scheme to hinder, delay or defraud creditors through multiple bankruptcy filings or transfers of property.  Under these circumstances, the Court may lift the stay and thereby eliminate the protections to which the debtor may have otherwise been entitled. 

Please continue to read HERE