The automatic stay provisions in the federal Bankruptcy Code provide immediate protection from creditors when a debtor files a petition for bankruptcy under Chapter 7 or Chapter 13. However, the law includes exceptions to the stay, and a creditor can ask the bankruptcy court to lift the stay in specific situations.
Section 362 of the Bankruptcy Code contains the automatic stay provisions. The section is extremely complex, both in terms of what creditor actions are stayed pending resolution of the bankruptcy case and also regarding exceptions to the stay.
Generally, the stay prohibits creditors from proceeding with actions against the debtor’s assets outside the bankruptcy process, such collections, foreclosures, legal actions, garnishments, and more. The rule prevents many creditors from collecting on debts during the bankruptcy case.
The goals of the automatic stay include preserving the value of the bankruptcy estate and treating creditors equally in distribution of the bankruptcy assets. The stay is effective as soon as the bankruptcy petition is filed. It lasts until the conclusion of the case, when some debts are discharged entirely.
For an individual debtor, the effect of the stay depends on the nature of their specific debts and circumstances. The statute lists a number of exceptions to the stay. They include criminal fines or restitution, actions relating to child custody or visitation, court orders relating to domestic support or domestic violence, tax proceedings, and other specific types of proceedings.
In addition to the limitations imposed by the exceptions, an individual creditor may file a motion for relief from the stay provisions with the bankruptcy court in specified situations. The court may grant relief by terminating, annulling, modifying, or conditioning the stay as to the creditor who files the motion.
A creditor who violates the automatic stay faces potentially severe sanctions from the bankruptcy court. While the court may excuse an inadvertent violation, any action taken in violation of the stay is void as a matter of law. If a creditor willfully violates the automatic stay, the court may impose financial damages, including attorney’s fees and even punitive damages.
When you file for bankruptcy, your lawyer will explain the effect of the stay on your debts and assets. If a creditor takes action that may violate the stay, you should immediately notify your lawyer. A petition in bankruptcy court may be necessary to enforce the stay and seek damages for the violation. In that situation, retaining a lawyer who focuses on bankruptcy litigation may be the best strategy for addressing stay violations, particularly if they are intentional.
On certain conditions listed in the statute, a creditor may file a motion in bankruptcy court seeking relief from the stay. The allowable reasons for requesting relief include “for cause, including the lack of adequate protection of an interest in property.” Under this provision, a secured creditor — such as a mortgage lender — may ask for relief from the stay. There are other types of creditors who may seek relief as well.
If a creditor is uncertain whether a transaction falls within an exception, the creditor may file motions with the court in the alternative, seeking a determination of whether the situation qualifies as an exception or alternatively asking for relief from the stay. These motions are contested matters within the bankruptcy case, rather than adversary proceedings.
If a creditor files a motion relating to the automatic stay, the debtor has the opportunity to respond. The bankruptcy court holds a hearing before making a decision. Since the motions involve court proceedings, representation by a bankruptcy litigation attorney often is advisable for both the bankruptcy petitioner and the creditor.
Depending on a debtor’s circumstances, a bankruptcy case can give rise to many different issues relating to the statutory automatic stay provisions. The petitioner’s bankruptcy lawyer sometimes can resolve the issues. However, when a dispute rises to the level of a contested matter or an adversary proceeding, assistance from a lawyer who focuses specifically on bankruptcy litigation may be beneficial. Experience in bankruptcy court legal proceedings, as well as knowledge of the special laws and rules that apply, can make a difference in the likelihood of success in a bankruptcy court contested matter or adversary proceeding.
Similarly, creditors who encounter issues with automatic stay exceptions or stay relief motions may benefit from representation by a bankruptcy litigation attorney. A lawyer familiar with bankruptcy court practice can assist not only with the actual court proceedings, but also with discussions, negotiations, and stipulations that may resolve the issues in an expeditious manner.
At the Dave Burns Law Office, I represent clients in contested matters and adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul. Bankruptcy litigation is a primary focus of my practice. If you encounter issues with the bankruptcy automatic stay provisions as a bankruptcy petitioner or creditor, I welcome you to contact me at (612) 677-8351 or by sending an email to me at firstname.lastname@example.org.
I am available to meet with clients in both Minneapolis and St. Paul. Inquiries from clients and referring attorneys throughout the State of Minnesota are welcomed.
The Dave Burns Law Office hopes you find this article helpful. But please do not rely on it as legal advice. The law changes regularly and the outcome of any legal matter depends on its unique circumstances. View full disclaimer