The Automatic Stay in Bankruptcy

The automatic stay is the single most powerful tool in the Bankruptcy Code. Section 362 of Title 11 creates an immediate, court-ordered injunction that takes effect the instant a bankruptcy petition is filed. It stops nearly every form of collection activity against the debtor and the property of the bankruptcy estate. No motion is required. No notice is required. The stay is automatic by statute.

What the Stay Stops

Section 362(a) prohibits:

• The commencement or continuation of judicial, administrative, or other proceedings against the debtor
• The enforcement of pre-petition judgments against the debtor or property of the estate
• Any act to obtain possession of property of the estate
• Any act to create, perfect, or enforce a lien against property of the estate
• Any act to collect, assess, or recover a pre-petition claim against the debtor
• The setoff of pre-petition debt owed to the debtor against a pre-petition claim against the debtor
• Commencement or continuation of most Tax Court proceedings concerning a pre-petition tax liability

In practical terms, this means foreclosures stop, sheriff's sales stop, wage garnishments stop, bank levies stop, repossessions stop, lawsuits stop, collection calls stop, and demand letters stop.

What the Stay Does Not Stop

Section 362(b) carves out a list of actions to which the stay does not apply:

• Criminal proceedings against the debtor
• Establishment or modification of domestic support obligations (child support, alimony)
• Collection of domestic support from property that is not property of the estate
• Tax audits, issuance of tax deficiency notices, and certain tax-assessment actions
• Withholding of income for repayment of certain loans from retirement plans
• Continuation of actions by a governmental unit to enforce its police or regulatory power (with limitations)
• Eviction proceedings where the landlord obtained a possession judgment pre-petition (subject to a narrow cure exception)
• Setoff of certain mutual debts between the debtor and the federal government for taxes

Special Limitations on the Stay for Repeat Filers

The 2005 BAPCPA amendments imposed limitations on the stay when a debtor has had a previous bankruptcy case pending in the prior year:

• One prior dismissal in the past year: The stay terminates 30 days after filing unless the court extends it on motion filed within 30 days, with a hearing showing the new case was filed in good faith.
• Two or more prior dismissals in the past year: No stay arises at all unless the court imposes one on motion within 30 days, with a hearing showing good faith.

These limitations make timing critical for clients with prior dismissed cases. We address them carefully at the consultation.

Remedies for Stay Violations

Section 362(k) entitles an individual debtor injured by a willful violation of the stay to recover actual damages, including costs and attorney's fees, and in appropriate circumstances, punitive damages. Common stay violation scenarios include:

• A collection agency that continues to call after notice of the bankruptcy filing
• A creditor that proceeds with a scheduled foreclosure sale or garnishment despite knowing of the filing
• A lender that withholds funds in a frozen account post-petition
• A creditor that files or continues a state-court lawsuit
• An employer that fires or disciplines an employee because the employee filed bankruptcy (separately addressed by Section 525)

Most stay violation cases are resolved without litigation once the creditor is notified of the filing. Where the violation is willful and harm has been caused, we pursue damages.

Lifting the Stay

Creditors can move under Section 362(d) for relief from the stay. Common grounds include lack of adequate protection (the creditor's collateral is depreciating without adequate protection payments) and lack of equity in property that is not necessary for an effective reorganization. In single-asset real estate cases, courts often grant stay relief on an expedited basis if the debtor cannot show a confirmable plan within 90 days.

Practical Importance

For a client facing a foreclosure sale scheduled for tomorrow, a wage garnishment that took half of last week's paycheck, or a bank levy that froze funds needed for rent, the automatic stay is the immediate relief. Filing the petition – sometimes a "skeleton" petition with the basic information, followed by the full schedules within 14 days – invokes the stay immediately.

Schedule a Consultation

If you need fast relief from collection activity, call 786-522-1411 or email [email protected]. Emergency filings are often possible within a few business days.