Automatic Stay

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An automatic stay in the United States relates to bankruptcy law. The stay is an automatic injunction that halts any action by creditors once a person formally files a bankruptcy petition. This means that the creditors must stop trying to collect debts from a debtor that has declared bankruptcy. An automatic stay remains in effect until the debtor receives a discharge under the bankruptcy, the judge lifts the stay, or the property is not longer property of the estate. To explore this concept, consider the following automatic stay definition.

Definition of Stay

Noun

  1. A temporary stopping of judicial or other proceeding by order of a court.

Origin

1400-1450        Late Middle English staien

Creditor Actions Stopped by a Bankruptcy Automatic Stay

Once a person legally files bankruptcy, the debtor is protected from various types of creditor actions, including:

  • Repossession of a home, car, or other property
  • Wage garnishment
  • Beginning or continuing lawsuits against the debtor
  • Creation, perfection, or enforcement of a lien against the debtor’s property
  • Collection lawsuits seeking a judgment

Other Actions Prevented by a Bankruptcy Automatic Stay

In addition to protecting the debtor from debt collection as described above, the bankruptcy automatic stay protects the individual from actions related to necessary public services:

  • Utility Disconnect – a temporary stay, up to 20 days in some jurisdictions.
  • Eviction – protection valid if the landlord has not received a judgment prior to bankruptcy filing. Automatic stay may not be effective if the landlord is already in the process of eviction, or if the debtor is using the property illegally.
  • Overpayment of Public Benefits – automatic stay stops collection of overpayments of public benefits such as food stamps, but does not protect debtor from ineligibility.
  • Collection of Delinquent Taxes – tax proceedings are temporarily stopped, though the IRS may still audit the debtor.

Purpose of Automatic Stay

The purpose of an automatic stay in bankruptcy is to create a stopping point for everyone to be able to assess the true position of the debtor. During the period of the stay, all parties have the opportunity to gather necessary documents to present to the court, and a single creditor is prevented from coercing the debtor into settling to the detriment of the other creditors.

Creditor Violation of Automatic Stay

When an automatic stay is in place, a creditor may be penalized for willfully taking prohibited action toward the debtor. Penalties for creditor violation may include payment of punitive damages to the debtor, as well as the debtor’s attorney’s fees. To prove to the court that a creditor has violated the automatic stay, a debtor must provide proof that the creditor was provided notice of the bankruptcy proceedings, and that the creditor took some collection action in spite of its knowledge that a bankruptcy petition had been filed.

Assuming the creditor was listed on the creditor mailing list provided to the court when the petition was filed, this proof may be provided in the form of collection notices from the creditor dated after the date of filing, or records of phone calls attempting collection received after the date of filing.

Notice to Creditors

A creditor must be provided notice that a debtor has filed bankruptcy, and is therefore subject to an automatic stay. The debtor may provide written notice to creditors of his intent to file bankruptcy, a copy of the file-stamped bankruptcy petition, or other written notice of the bankruptcy proceedings. Once the petition has been filed, the bankruptcy court sends notices to all of the creditors listed on the creditor mailing list (also called a “creditor matrix”).

In the event a creditor does not receive notice of the bankruptcy, collection actions may continue, with the excuse that the creditor is not aware of the automatic stay. For this reason, it is vital for debtors to keep records and proof that the creditor was given adequate notice.

Avoiding an Automatic Stay

Unfortunately for debtors, there are ways of avoiding an automatic stay. A creditor can ask the court to lift the stay if it can prove that the stay fails to provide “adequate protection,” or jeopardizes the creditor’s interest in a particular property.

For example, Marge files bankruptcy one day before her house is scheduled to be sold at auction due to a foreclosure. She has no equity in the house and is unable to pay the past due amount due. In fact, Marge has no means to keep the house at all. The mortgage holder may ask that the court lift the stay, as Marge will lose the house regardless of the bankruptcy proceedings. In this case, it is likely the court will grant the lender’s request, allowing it to go forward with the sale of the home.

Criminal Proceedings

Bankruptcy, and therefore the automatic stay process, is not part of criminal law procedure. If a bankruptcy case is somehow mixed with criminal proceedings, however, the bankruptcy judge may order the issues separated, and impose the automatic stay pertaining to the bankruptcy only.

Related Legal Terms and Issues

  • Civil Suit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
  • Debtor – A person who is in debt, or under a financial obligation to another.
  • Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
  • Default – Failure to fulfill an obligation, or to appear in a court of law when summoned.
  • Creditor – A person or entity to whom money is owed by another person or entity.
  • Judgment – A formal decision made by a court in a lawsuit.
  • Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit, or criminal proceedings.
  • Jurisdiction – The legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.