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Automatic Stay

The filing of a bankruptcy case, under any chapter of the Bankruptcy Code, triggers an injunction against the continuance of any action by any creditor against the debtor or the debtor's property.  11 U.S.C. 362.  

In Chapter 13, the stay even protects co debtors who are liable with the debtor on consumer debts.

The automatic stay gives the debtor protection from his creditors, subject to the oversight of the bankruptcy judge, and brings all of the debtor's assets and creditors into the same forum, the bankruptcy court, where the rights of all concerned can be balanced.

The '05 amendments to the Bankruptcy Code instituted limitations on the duration of the stay in the case of repeat filers: debtors who had a prior case pending in the last year which was dismissed get a stay of 30 days; debtors with two or more cases pending in the past years but dismissed get no stay at all. The debtor in those situations must seek a stay from the court in order to have the protection of the automatic (or not so automatic) stay. Here's a technical outline of the changes.

Prohibited acts

The automatic stay prohibits 

• Beginning or continuing law suits
• Collection calls
• Repossessions
• Foreclosure sales
• Garnishment or levies

The automatic stay remains in effect until

• a judge lifts the stay at the request of a creditor;  
• the debtor gets a discharge; or 
• the item of property is no longer property of the estate.  

Thus in Chapter 7, the stay may prevent immediate foreclosure on a debt secured by real estate but the stay will expire, and the creditor freed to proceed,  when the debtor gets a discharge.  (This assumes that there is no non exempt equity in the property for the bankruptcy estate.) In Chapter 13, the stay remains in effect for the life of the Chapter 13 plan.

  More on how a creditor gets relief from the automatic stay

Stay permanent upon discharge

When the debtor gets a discharge, the automatic stay is replaced by a permanent injunction prohibiting creditors from all of those actions with respect to discharged pre petition debts that the automatic stay prohibited.  More on the nature of the bankruptcy discharge.

Outside the stay

The automatic stay does not stop the following:

• Criminal proceedings
• Actions for a family support order or the modification of such order
• Actions to collect support from property that is not property of the estate
• Tax audit, demand for tax returns or assessment of tax (collection of tax is still stayed:  the tax authorities, to their chagrin, are subject to the stay, just like other creditors).

Violations of the stay

Anyone who willfully violates the stay in the case of an individual  is liable for actual damages caused by the violation and sometimes for punitive damages.  Some courts confine the right to damages to individual debtors and  deny damages for stay violations as to corporate debtors.  

Since the court usually takes several days to several weeks to mail creditors notice of the bankruptcy, it is incumbent on the debtor or debtor's counsel to give actual notice to creditors who might take action without knowledge of the stay.

Creditor actions taken after the stay is in place are generally void or voidable:  that is, any action the creditor takes in violation of the stay has no legal effect.

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11/26/06