What Is It? What Is Its Purpose? How Does It Work? Are There Exceptions to Its Application?
When you’re struggling to meet your financial obligations, the stress can be overwhelming. The constant calls, letters, and threats of legal action from creditors only add to your level of anxiety. Fortunately, when you file for bankruptcy, you immediately get the protection of the automatic stay.
What Is the Automatic Stay?
Your bankruptcy petition will ask the court either to permanently discharge your debts under Chapter 7 or restructure your obligations under Chapter 13. Either way, the automatic stay will go into effect immediately upon your filing. The automatic stay is available in both business and personal bankruptcies.
The stay immediately stops all other legal proceedings related to the collection of your debts outside the bankruptcy court. It also requires creditors to immediately suspend all collection efforts, including telephone calls, emails, text messages, and demand letters. The automatic stay suspends virtually all civil proceedings, including foreclosure and repossession actions, as well garnishment and eviction proceedings.
Examples of Actions Prevented by the Automatic Stay
Once a bankruptcy petition is filed, creditors may not:
- Make any written request for payment of a debt
- Call a debtor at home, work, or by cell phone to discuss payment of a debt
- Seek to enforce a judgment to collect a debt
- File a lawsuit for breach of contract or failure to pay a debt
What Is the Purpose of the Automatic Stay?
The automatic stay protects both the debtor and their creditors. Debtors get a break from the constant attempts to collect the debt, and, in a reorganization proceeding, can focus on putting a realistic plan together without undue pressure from specific creditors. The automatic stay also serves to ensure that all creditors are treated equally. Without the automatic stay, those creditors who file legal claims first would likely take all the available assets, leaving other creditors with nothing.
Are There Exceptions to the Automatic Stay?
Exceptions to the automatic stay are listed in Section 362(b) of the U.S. Bankruptcy Code:
- A creditor may communicate with a debtor who is a party to an open securities transaction solely for the purposes of closing out that transaction.
- A landlord may communicate with a tenant debtor in situations where the lease was fully terminated before the date of the bankruptcy filing.
- A local, state, or federal tax authority may communicate with a debtor for the purpose of performing a tax audit, to demand a tax return, or to make a tax assessment.
- The court may allow a creditor to circumvent the automatic stay when there is “inadequate protection of an interest in property,” such as situations where the value of property is expected to decline significantly while the automatic stay is in place
- Some types of debt are not protected by the automatic stay, including child support, spousal support (alimony), and money owed as criminal restitution.