What is an Automatic Stay in a Bankruptcy?

An automatic stay is a court injunction that prevents non-secured creditors and most secured creditors from collecting on debts, fees, or notices. The stay also prevents said entities from attempting to repossess, foreclose, or “harass” the debtor through notices, phone calls, or other contacts. The stay ends when the court lifts the order, when the property in the debtor's estate is given away or declared exempt from the proceedings, or when the stay expires according to a preset timeframe.

It's important to know that an automatic stay doesn't necessarily stop all pending creditor actions. In a bankruptcy that's impacted by divorce proceedings, for instance, an ex-spouse may still file petitions to collect palimony, child support, or other moneys due as a result of settlement. The government may not be able to collect income taxes during a stay, but its entities can attempt to collect on other tax related delinquencies, pursuant to the bankruptcy code and to the priorities set by the trustee of the estate.

The stay also prohibits plaintiffs from continuing lawsuits or starting lawsuits against the debtor. If a creditor violates the orders of the stay, not only may the trustee of the court force the creditor to remunerate the debtor for any damages done, but he may also punish the creditor by levying fines or other fees. That said, creditors aren't necessarily helpless in the face of an automatic stay.

A creditor may petition the court for a relief from the stay and attempt to collect during bankruptcy. The court stay goes into effect immediately upon filing. But it usually takes bankruptcy notices a few days or more to arrive. Thus, to stop foreclosures, lawsuits, and other past due notices, it's up to the debtor and his or her attorney to make creditors aware of the bankruptcy related stay.

But even if a creditor is “unaware” of the stay, the debtor relief goes into action at the moment of filing. Thus, creditor notices that come out after that date are considered null and void by the law, and the debtor can safely ignore them. That said, in the interest of clarity, it behooves the debtor to inform his or her creditors of the stay as soon as possible.