There are several procedural aspects of bankruptcy that are important for a debtor to know. Among these requirements is the automatic stay. An automatic stay is actually a powerful tool for debtors to stop creditors from engaging in collection efforts. However, use of the automatic stay requires an understanding of its parameters, limitations, and legal requirements.

What Is the Automatic Stay in Federal Bankruptcy?

Section 362 of the Bankruptcy Code is a provision that applies to all chapters and types of bankruptcy. This specific provision of the federal bankruptcy law states that as of the time a bankruptcy action is filed under Sections 301, 302, 303 of the Bankruptcy Code or Section 5(a)(3) of the Securities Investor Protection Act of 1970, there is a stay on all transactions or payments to creditors and other specified entities. This stay operates like an injunction, to place a legal hold on repayment of any debts or loans.

Under the automatic stay, creditors must cease all collection efforts against the debtor and are very limited in their options for recovering any outstanding debts or upcoming payments. The creditor actions specifically impacted by Section 362 of the Bankruptcy Code are garnishments, repossession, eviction, lawsuits, and home foreclosure. Other means of collection are also prohibited, including creditor phone calls and payment reminders.

What Is the Impact on the Debtor?

The debtor must also follow specific rules and procedures under the automatic stay. A debtor cannot choose to repay specific or favored creditors, in fact, payment to any creditor after filing for bankruptcy is prohibited. All assets in the estate, including most property, are under the control of the bankruptcy trustee.

However, under the automatic stay, the debtor also receives considerable protection from creditors. In many instances, the debtor is stressed, anxious, and upset over the accumulated debt and continuous communication from creditors. The automatic stay can reduce these emotional and mental implications of debt before the bankruptcy process beings.

Due to the automatic stay, the debtor no longer has to receive or answer collection phone calls or letters. There isn’t any threat of repossession of a vehicle, immediate loss of utilities, eviction, or a creditor foreclosure on real estate. These assets might be sold in bankruptcy, but then the sale will be overseen by the trustee and administered through fair court processes.

What Is the Purpose of the Automatic Stay?

Many debtors and creditors, for that matter, wonder why the Bankruptcy Code contains the automatic stay. Its purpose is to provide the bankruptcy trustee and court with time to review the assets and debts held by the debtor and determine the proper course of action under the Bankruptcy Code for repaying creditors. Without the automatic stay, creditors would be rushing to repossess or file a lawsuit for specific assets or a debtor could drain an estate to repay a single creditor – leaving creditors with priority out to dry.

Additionally, the automatic stay is intended to protect the debtor. Preparation for bankruptcy is important, and the time allotted by the automatic stay helps a debtor arrange for the process of bankruptcy without constant concern that creditors will take sudden collection actions.

The automatic stay remains in place, as a protection to the debtor, for the duration of the bankruptcy proceedings. It isn’t lifted until the bankruptcy case is discharged or the bankruptcy case closed. However, the automatic stay doesn’t prevent creditors from receiving repayment, and in some instances, the bankruptcy court will approve a creditor’s request to lift the automatic stay.

Lifting the Automatic Stay and Exceptions

A creditor can ask the bankruptcy court to lift the automatic stay. The request to lift an automatic stay is filed with the court and must be submitted in writing and with a great explanation of the need for lifting the automatic stay. A debtor shouldn’t be surprised or nervous to hear this motion filed with the court, but must also know when this request is approved.

Courts are usually in favor of keeping the automatic stay in place. This means creditors have a tough obstacle to overcome when requesting a court lift the automatic stay. A creditor might argue that his or her collection actions fall outside the bankruptcy and don’t impact the assets in the bankruptcy estate. The most common use of this request is to proceed with a lawsuit for child custody. Other lawsuits in the process when bankruptcy is filed may also have good reason to lift the automatic stay.

As well, there are certain exceptions to the automatic stay. For example, under the Bankruptcy Code, the automatic stay is limited to a second bankruptcy filing and never goes into effect for a third bankruptcy filing within a year.

Questions About the Automatic Stay

Do you have additional questions about the automatic stay and how it impacts debtors? Call New York bankruptcy attorney, Simon Haysom, and have these important questions answered today. Located in Goshen, NY, Simon Haysom, LLC can be reached at (845)-294-3596.

The information in this blog post (“Post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this Post should be construed as legal advice from Simon Haysom, LLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter.