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The automatic stay

Once a bankruptcy petition is filed, it immediately operates as an automatic stay, holding in abeyance many forms of creditor action against the debtor. Automatic stay provisions work to protect the debtor against most actions from the creditor,

The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition. As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed. 11 U.S.C. § 362(a). The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U.S.C. § 362(b). The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor’s financial situation.

Examples of Prohibits acts once the the automatic stay is active:

    •    Beginning or continuing law suits
    •    Collection calls or dunning letters
    •    Repossessions
    •    Foreclosure sales
    •    Garnishment or levies
    •    Filing a “financing statement” to perfect a security interest.
    •    Suspending your driver’s license

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. 

Immediate Stay For Foreclosure Actions

In a  Chapter 7, the stay may prevent immediate foreclosure on a debt secured by real estate but the stay expires, and the creditor is free to proceed,  when the debtor gets a discharge.  ( assuming that there is no non exempt equity in the property for the bankruptcy estate.)

In Chapter 13, the stay remains in effect for the life of the Chapter 13 plan.

The Automatic Stay becomes permanent upon discharge.

Following the 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 originally prohibited.

The automatic stay does not stop the following:

    •    Criminal proceedings
    •    Actions for a family support order or the modification of such order
    •    paternity proceedings
    •    Actions to collect support from property that is not property of the estate
    •    Tax audit, demand for tax returns or assessment of tax (collection of tax is still stayed:  the tax authorities, to their chagrin, are subject to the stay, just like other creditors)
    •    repaying a loan from certain types of pensions
    •    With residential real estate leases, landlords seeking to evict tenants are free to complete evictions if the landlord already has a judgment of possession
    •    doesn't stop or postpone actions to suspend driver's licenses and revoke professional licenses related to a prosecution by a governmental unit, like your state’s attorney general office.

When Creditors Violate the Automatic Stay:

Anyone who willfully violates the automatic stay is liable for actual damages caused by the violation and sometimes for punitive damages.  Some courts have confined the right to damages to individual debtors and  deny damages for stay violations as to corporate debtors. 
There is usually a delay form the date of filing to the day the creditor receives notice of the Automatic Stay, so it is important, that a debtor notify the creditor of the bankruptcy filing and provide them with a Notice of Automatic Stay.

Any action taken by the creditor  after the automatic stay is in place is generally void or voidable.  In other words,  any action the creditor takes in violation of the stay has no legal effect.

Relief from the Automatic Stay

Under specific circumstances, the secured creditor can obtain an order from the court granting relief from the automatic stay. For example, when the debtor has no equity in the property and the property is not necessary for an effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to foreclose on the property, sell it, and apply the proceeds to the debt. 11 U.S.C. § 362(d).

The Bankruptcy Code permits applications for fees to be made by certain professionals during the case. Thus, a trustee, a debtor’s attorney, or any professional person appointed by the court may apply to the court at intervals of 120 days for interim compensation and reimbursement payments. In very large cases with extensive legal work, the court may permit more frequent applications. Although professional fees may be paid if authorized by the court, the debtor cannot make payments to professional creditors on pre-petition obligations, i.e., obligations which arose before the filing of the bankruptcy petition. The ordinary expenses of the ongoing business, however, continue to be paid.

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