How Does Bankruptcy Automatic Stay Work?

When you file a bankruptcy petition, your creditors are required to immediately stop collection attempts.  This provision of the bankruptcy code is known as the automatic stay provision.

What is an Automatic Stay?

In bankruptcy, an automatic stay prevents a creditor from:

• Filing or continuing a law suit against the debtor;
• Making collection calls or other collection attempts;
• Repossessing property;
• Foreclosing property (even if the debtor filed bankruptcy to delay or prevent a foreclosure); and
• Otherwise trying to collect on the debt.

Does Every Bankruptcy Petitioner Qualify for an Automatic Stay?

No, not all bankruptcy petitioners will qualify for the benefits of the automatic stay provision when they file a bankruptcy petition.  Creditors may not be required to stop collection attempts if:

• They are secured creditors and they are granted a specific exception from the Bankruptcy Court.  Secured creditors with an interest in a specific piece of real estate may be entitled to certain protections if the debtor is using bankruptcy to delay or prevent a foreclosure;
• They are evicting the debtor from a rental pursuant to specific circumstances; and
• The debtor had previous bankruptcies dismissed within the preceding year.  In these cases the automatic stay may be shortened or the debtor may have to file a motion to request the stay from the Court.

As a Creditor, What Should I Do if an Automatic Stay is in Place?

The first thing that you should do as a creditor is determine if you qualify for any of the exceptions described above.  If you do not qualify for any of the exceptions then you may request that the Bankruptcy Judge lift the automatic stay.

What Happens if the Automatic Stay is Violated?

A creditor who knowingly and willingly violates an automatic stay is liable for compensatory and possibly punitive damages.  Likewise, a debtor who does not comply with legitimate creditor demands that are allowed while an automatic stay is in place may be liable for damages.

It is important for both debtors and creditors to understand the implications of an automatic stay to avoid penalties and to protect their rights in a bankruptcy proceeding.  A bankruptcy lawyer can help you file the necessary paperwork and take the appropriate actions to protect your rights.