One of the main reasons why people file for bankruptcy is that they are immediately granted something called an automatic stay. In this article, we’ll define automatic stay and explain how it works.

Key Takeaways

• An automatic stay is a bankruptcy law provision temporarily preventing creditors from pursuing debtors for money that they owe
• Automatic stays go into effect the moment a debtor files for bankruptcy and last until the case is closed
• A debtor can sue a creditor who continues to contact them after an automatic stay is in place
• Automatic stays protect debtors from foreclosure, eviction, utility disconnections, and so on
• Creditors can petition the court to lift automatic stays and there are certain debts exempt from automatic stays
• Automatic stays level the playing field between creditors so rather than a single creditor seizing all of a debtor’s assets, they each receive an equal share

What Is an Automatic Stay?

An automatic stay is a provision in bankruptcy law that temporarily prevents creditors, government entities, and collection agencies from pursuing debtors for money that they owe. It goes into effect the moment that a debtor applies for bankruptcy. 

The benefits of an automatic stay are often one of the main reasons why people file for bankruptcy. Automatic stays can temporarily prevent foreclosure, eviction, utility disconnections, collection of overpaid public benefits, and multiple wage garnishment.

Automatic stays last as long as the bankruptcy proceeding does and stop if the case is dismissed.

Automatic stays apply to individuals and businesses alike, as well as to all the chapters of the bankruptcy code. However, they do not apply to non-debtor entities such as corporate affiliates, corporate officers, and guarantors. 

Automatic stays protect debtors against the following action by creditors:

• Starting court proceedings against the debtor
• Continuing court proceedings against the debtor
• Moving to a foreclosing on a debtor’s property
• Creating or enforcing a lien against a debtor’s property
• Attempting to repossess collateral

If a creditor continues to contact or attempt to sue a debtor after an automatic stay is in place, the debtor is eligible to sue the creditor. However, creditors who believe they have sufficient grounds to do so can petition the bankruptcy court to lift the automatic stay so they can continue the collection process. 

This is usually granted for situations in which the value of a property or secured collateral will decrease while the bankruptcy case is being resolved. Automatic stays may also be lifted if the property in question is not directly owned by the debtor or will not be included in a bankruptcy reorganization.

An additional objective of automatic stays is to put all the creditors on a level playing field, effectively preventing a single creditor from seizing all of a debtor’s assets before the others have had the chance to do so. Because creditors are unlikely to receive the full amounts that they are owed, they each receive a proportional share of the debtor’s assets. 

Exemptions to Automatic Stays

The following types of debts are exempt from automatic stays:

• Child support payments
• Alimony payments
• Money owed as a result of a criminal proceeding