The Automatic Stay what is it? Why is it important in Bankruptcy Practice?

29 May

The Automatic Stay what is it? Why is it important in Bankruptcy Practice?

What is the Automatic Stay?

When a bankruptcy is filed, in most cases, an automatic court order goes into effect that prevent most creditors from collecting against debts. This automatic court order is known as the automatic stay. In the bankruptcy code it is found at 11 USC 362.

In general most types of collections are stayed when a bankruptcy is filed. This would include even debts that might not ultimately be discharged. For example, many taxes are not discharged but the taxing agency may not collect during the discharge.

How long does the Automatic Stay last?

The automatic stay remains in effect until either the bankruptcy is discharged or dismissed. There are exceptions to this. A secured creditor may request that the stay be lifted in order to collect on a debt in which they lack “adequate protection”. Another exception is if there are prior bankruptcies that were dismissed within the past 12 months. If there is one prior dismissal then the stay only lasts 30 days unless there is a motion to extend it. If there are two or more bankruptcies then the debtor must requests that a stay be granted.

Are there exceptions to the Automatic Stay?

Yes, Child support is specifically excepted from the automatic stay. Furthermore a state court may evict a tenant despite the stay when the evicting court has already issued an order for the eviction. Since Bankruptcy only deals with civil debts, a criminal court is under no obligation to stay their proceedings. There are additional exceptions that are found in the bankruptcy code.

What about Garnishments and Utility Shutoffs?

Even if there is a garnishment that is proceeding the garnishment is stayed upon the filing of the bankruptcy. Any monies that were collected after the filing of the case will be returned to the client. Furthermore if there is a utility shutoff, upon the filing of the case the utilities should be restore. However, if the debtor acted fraudulently in obtaining the utility (such as reopening the gas line illegally after it is shutoff) the utility is under no obligation to set it up again.

Phone Calls?

The automatic stay prevents a creditor from calling you to collect a debt. I find that companies take this rule very seriously and will stop all correspondence including regular statements, whether or not you want them to send the correspondence.

What if a creditor violates the automatic stay?

If the creditor had no knowledge of the automatic stay then they may be responsible for recouping certain type of damages (example would be returning a garnishment), but they would not be liable for attorney fees. If on the other-hand the company willfully violated the order, then the company would be liable for attorney fees that were expended by the debtor in enforcing the order. The bankruptcy judge upon the filing of a motion would make that determination.

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