Automatic stay is a provision in the bankruptcy law which protects a debtor from creditors after filing for bankruptcy. It is the bankruptcy equivalent of a temporary injunction against virtually all creditor activity against the debtor. It provides the debtor immediate calm amidst the storm of financial difficulties. In Chapter 7 cases it protects debtors’ exempt property and gives the trustee the chance to see what assets are in the debtors’ hands without interference from creditors.
The automatic stay comes into force as soon as a bankruptcy petition is filed by the debtor and it prohibits the creditors from pursuing judgments, garnishments, foreclosure proceeding, or repossessions. Creditors must also cease all phone calls, letters, e-mails, and any other form of communication with the debtor. It is not legal for them to continue attempts to collect on any debts.
However, the protection of the automatic stay can be limited and there are exceptions too. Not every type of debt is covered by the automatic stay. For example, if a debtor is in a situation where his/her landlord gets a rent and possession judgment against him/her for rent before the filing of the bankruptcy that is not protected by the automatic stay. 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 are some other actions not stopped by Automatic stay. Also, those who have previously filed for bankruptcy can lose the protection of the stay.
A secured creditor can ask the court for a motion for relief from the automatic stay upon a showing of cause. A secured creditor has a claim on a debt that is secured by collateral, such as a mortgage on a home or a loan on a vehicle.
Normally, 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. 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. In the typical Chapter 7 case, the Automatic Stay will terminate approximately 90 to 100 days after the filing of the bankruptcy case.
Willful violation of automatic stay can make a person liable for the consequences of violation and also for punitive damages. However, since the court usually takes several days to several weeks to mail creditors notice of the bankruptcy, it is upon the debtor or debtor’s counsel to give actual notice to creditors who might take action without knowledge of the stay.