The Bankruptcy Automatic Stay
When a bankruptcy is filed, whether it is Chapter 11 or Chapter 7, a number of different things occur. Probably the most important is that an “automatic stay” is implemented. What is the automatic stay?
The automatic stay is an implied order of the bankruptcy court which suspends (or stays) all actions against the bankrupt party (more commonly referred to as the debtor). All efforts to collect on a debt owed by the debtor are stayed. All actions of any kind impacting property of the debtor are stayed. Thus for example, if you are a plaintiff in a lawsuit and the defendant files bankruptcy, your lawsuit cannot proceed. If you have obtained a judgment and are in the process of levying on assets of the debtor in order to collect on the judgment, all levying must stop. Often, the automatic stay is utilized to stop a secured party from foreclosing on collateral.
The purpose of the stay is to ensure that all actions against the debtor, and all property of the debtor, are dealt with in the bankruptcy court, rather than in piecemeal fashion around the country or around the globe. However, the automatic stay is not permanent. The Court has the ability to “lift” or “grant relief from” the automatic stay under certain circumstances. Also, the automatic stay expires when a bankruptcy case is dismissed or closed or the date a discharge is either granted or denied, whichever is earlier.
Failure to abide by the automatic stay can result in punitive damages, if the stay violation is found to be willful. However, any stay violation, even if inadvertent, results in the action’s being considered void, as if it never happened.
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