Bankruptcy & the Automatic Stay
What is bankruptcy?
Bankruptcy helps people who can no longer pay their debts get a fresh start by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect financially troubled businesses.
Filing bankruptcy can help a person by discarding debt or making a plan to repay debts. A bankruptcy case normally begins when the debtor files a petition with the bankruptcy court. A petition may be filed by an individual, by spouses together, or by a corporation or other entity.
Individuals may file Chapter 7 or Chapter 13 bankruptcy, depending on the specifics of their situation. Businesses may file bankruptcy under Chapter 7 to liquidate or Chapter 11 to reorganize.
When someone files for bankruptcy, the bankruptcy court institutes what is known as an automatic stay.
What is the automatic stay?
The automatic stay is an automatic injunction that halts actions by creditors, with certain exceptions, from collecting debts from a debtor who has declared bankruptcy. The stay stops all collection actions. The automatic stay is an important concept in bankruptcy law. Under the Bankruptcy Code, the stay begins at the moment the bankruptcy petition is filed. A debtor may sue a creditor who continues to contact them or who attempts to sue them after an automatic stay is in place. Certain debts, however, such as child support, IRS tax deficiencies, and loans from pensions, are not stayed. The benefits of an automatic stay are often a primary consideration in a debtor’s decision to file for bankruptcy.
What is the purpose of the automatic stay?
The automatic stay puts all creditors on a level playing field and prevents one creditor from seizing a debtor’s assets before others have had the opportunity to do so. Once an automatic stay goes into effect, creditors are unlikely to receive the full amounts they are owed. Instead, creditors will receive a proportional share of the bankrupt debtor's limited assets.
Certain creditors, secured creditors, may petition the bankruptcy court by filing a Motion for Relief from the Automatic Stay upon a showing of cause.
What is Relief from the Automatic Stay?
Relief from an automatic stay is granted to creditors under three instances.
The most common example is in regards to possession of property. Relief may be granted if the property is not directly owned by the debtor or if the property will not be included in a bankruptcy reorganization.
Second, the court may grant relief from the automatic stay “for cause, including the lack of adequate protection of an interest in property . . . .” Quite simply, this relates to circumstances in which the value of a property or secured collateral may decrease while the bankruptcy case is being resolved.
The final type of case that may qualify for relief is single asset real estate bankruptcy cases which involve less than $4 million in secured debt.
How Long is the Automatic Stay?
The automatic stay lasts as long as the bankruptcy lasts, and ceases if a case is dismissed.
Having more than one bankruptcy case pending at the same time is known as serial filings. If a debtor has had one case pending during the previous year and then files a second one, the automatic stay will only last for 30 days in the second case, unless the court agrees to extend it. If a debtor has had two cases pending during the previous year, no automatic stay will go into effect when a third case is filed, unless a motion is filed with the court and a judge agrees that filing three cases is reasonable for that debtor’s circumstances.
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