What is a Bankruptcy Stay and How Does It Work?

by
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC

A bankruptcy stay is an injunction that stop creditors from starting or continuing collection efforts against a debtor. It becomes effective immediately and automatically upon the filing of a bankruptcy petition.

The bankruptcy stay is effective without any action of the court and applies to creditors regardless of whether they know about the bankruptcy. The purpose of the stay is to give the debtor breathing room so he or she can reorganize their financial affairs or so the debtor’s assets can be sold. The court wants to (1) make sure the debtor’s money is distributed evenly among creditors based on the legal priority of their claims, and (2) prevent a race to the courthouse by creditors who want to seize an advantage over other creditors.

These Actions Can Be Stayed
1. Lawsuits. Starting or continuing any legal, administrative or other action, including appeals, against the debtor based on a claim that existed prior to filing for bankruptcy. In most cases, the automatic stay protects only the debtor and not third parties; however, in chapter 13 bankruptcy cases, the stay applies to a co-debtor who is also liable for a consumer debt.
2. Judgment Enforcement. The automatic stay stops the enforcement of a judgment against the debtor or his property. This includes activities like levies and garnishments.
3. Taking Possession or Control Over Estate Property. Any act to take possession of or to try to control bankruptcy property from the estate.
4. Collections. Any act to collect money from the debtor because of a pre-bankruptcy claim, such as collection calls, letters, and so forth.
5. Liens. Any act to make or enforce a lien against the estate’s or the debtor’s property because of a pre-bankruptcy claim.
6. Setoff. Money owed to the debtor cannot be used to satisfy a claim against the debtor without the approval of the bankruptcy court.
7. Litigation in Tax Court. Starting or continuing any litigation in tax court against the debtor.

These Actions Cannot Be Stayed
1. Criminal Prosecution. Starting or continuing a criminal prosecution or investigation against the debtor.
2. Domestic Proceeding. Starting or continuing a civil action regarding paternity, alimony, child custody, or divorce as well as collecting money for these obligations from non-estate property.
3. Perfecting Liens. The law allows the lienholder to perfect its lien as long as it’s within the statutory time period for perfection.
4. Enforcing Nonmonetary Police & Regulatory Powers. Starting or continuing to enforce police or regulatory powers to protect the public safety, health and welfare, including enforcing nonmonetary judgments.
5. Enforcing a Lien Against a Debtor That’s Ineligible. Any activity that enforces a lien or security interest against an ineligible debtor’s real property.