Bankruptcy and the Automatic Stay

What is the Automatic Stay?

As soon as you file for bankruptcy, there is an automatic injunction as a matter of law. This is known as the automatic stay. In order for the automatic stay to apply, all you need to do is commence the case. The automatic stay is established by 362 of the bankruptcy code.

What Does the Automatic Stay Do?

Once you file for bankruptcy and the automatic stay is imposed, any activity to collect from a debtor or enforce or pursue claims against a debtor are prohibited if they take place outside the bankruptcy proceeding. No one can “use up” any of the debtor’s property outside of the bankruptcy. The scope is explained in more detail in 362 a and b. The automatic stay is said to be a great equalizer in that all the creditors have to go through the bankruptcy court to enforce or collect on debts. No one can gain an advantage by proceeding outside the bankruptcy court once the stay is in place. Bear in mind that is possible for certain creditors to obtain relief from the stay in certain cases. Also, keep in mind that creditors can still continue with proceedings in the bankruptcy court itself.

Who is Bound by the Automatic Stay?

The short answer is everyone. This includes entities as the word is defined in 101(15) of the bankruptcy code. Included in this definition is individuals, all of the various types of corporate entities and even instrumentalities of the government in certain cases. Even if the entity had no notice of the stay, they are still barred from proceeding.

What Actions are Not Included in the Stay?

There are quire a few exclusions from the bankruptcy stay included in 362(b). We’re not going to get into all of them but by far, the most common include:

1) Criminal Enforcement: Even if you file bankruptcy, the automatic stay doesn’t always apply to collections based on some underlying criminal conduct. Speak with a bankruptcy attorney if you are considering filing for bankruptcy but have criminal charges or convictions whereby you are a debtor.
2) Child Support: The law provides specific exclusions and provisions regarding child support. One of these is exclusion from the automatic stay. In other words, even if you file for bankruptcy, the automatic stay will not prevent actions to establish or modify support obligations, custody, marriage dissolution or family violence. For more information, see 363 (b)(2)(b).
Non-monetary judgments by the government: The government can continue against a debtor even after bankruptcy if the government is pursuing non-monetary judgments. For example, in the enforcement of environmental laws, the government may pursue an action to force someone to clean up or remediate but not seek monetary awards. These types of judgments can continue even beyond the automatic stay.

What Happens if the Stay is Violated?

First and foremost, any legal rights or advantages are nullified if they were gained in violation of the automatic stay. If it can be established that the violation was deliberate, there could be attorneys fees, punitive damages or sanctions. This is on top of any actual loss that can be shown by the debtor. It is even possible in some courts for the debtor to obtain damages resulting from emotional distress for violations of the stay.

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