Automatic Stays in Bankruptcy: What are they and can they be lifted?

Automatic Stays in Bankruptcy: What are they can they be lifted?

by Justin Brewer, Associate Attorney

When a person or business files for bankruptcy, the bankruptcy court issues an automatic stay, which stops creditors and third parties from starting or continuing collection actions and other lawsuits. The automatic stay is an injunction, designed to protect the debtor and any co-debtors from creditors’ collection attempts or other lawsuits while the bankruptcy proceedings take place.

The automatic stay is a powerful tool to protect debtors. If a creditor knowingly violates the stay, debtors can recover damages, including attorneys’ fees and costs from the creditor. Further, any actions taken in violation of the stay are voided.

However, the automatic stay is neither permanent nor absolute. It doesn’t stop every type of lawsuit, nor every type of collection action. The stay will only last until the termination of the proceedings, and in some circumstances, creditors can ask for the stay to be lifted.

What are the exceptions to an automatic stay?

The automatic stay is a blanket injunction against collections, but there are exceptions. In the following circumstances, third parties can continue their collection or legal actions against a debtor.

1. Criminal Prosecution: any ongoing or new criminal prosecutions or proceedings are not halted by the automatic stay.
2. Family Law actions: actions in family law cases, such as establishing paternity, establishing or modifying child support, establishing or modifying child custody or placement, and even certain divorce actions are not halted by the automatic stay.
3. Government Action: government actions to enforce their regulations or more are not halted by the automatic stay, including withholding from paychecks to pay loans against pensions or 401ks.
4. Previous Bankruptcy Liens: liens from a previous bankruptcy are not halted by the automatic stay.
5. Evictions: evictions that a debtor received notice of prior to filing bankruptcy are not halted, and debtors can still be evicted during the stay for property endangerment or illegal use of substances.

How can automatic stays be lifted?

In order to lift or remove the stay, creditors need to move the court to do so for the collateral property they have an interest in. A court can lift the stay when a creditor’s interest in property of the bankruptcy estate is not adequately protected, when the debtor does not have equity in the property, or when the property is not necessary for an effective reorganization under bankruptcy. A creditor will have to make a motion to the court to receive the stay. Courts can also grant emergency relief from the stay to prevent irreparable damage to collateral covered by the stay.

While the automatic stay is a powerful tool for debtors, it is not an impenetrable defense. Negotiating the bankruptcy automatic stay can be confusing and complex; if you need help understanding the automatic stay, or any other matter related to bankruptcy or collections, the experienced team of attorneys at Russell Law Offices S.C. is here to help! Please note, Russell Law Offices, S.C. only represents the creditor, not the debtor.