Debtor Safe Haven: The Automatic Stay

The Automatic Stay

When a bankruptcy petition is filed, something goes into effect known as the “automatic stay.” The automatic stay protects the debtor (who is filing bankruptcy) from most efforts by creditors to collect debt. The stay remains in place until the bankruptcy case is closed or dismissed, the discharge order is granted or denied, or there is no longer any property left in the estate.
However, the stay does not come without limits. The bankruptcy proceeding must be filed in good faith. Additionally, the scope of the stay does not extend to debts that are incurred after the debtor’s petition is filed. In some cases, a debtor may have to overcome a presumption of bad faith if they have a prior dismissed case for a number of reasons (e.g., the debtor failed to comply with a Chapter 13 bankruptcy payment plan.

Exceptions to the Stay

In addition to the limits of the stay, there are also exceptions to the stay. Specifically, there are 27 exceptions to the stay outlined in Section 362(b) of the Bankruptcy Code. Some of these exceptions include:

• criminal proceedings;

• evictions for leases terminated prior to the stay;

• any act to create, perfect, or enforce any lien against the property of the estate; or

• the commencement or continuation of a proceeding in the United States Tax Court regarding tax liability. See 11 U.S.C. 362(b).
The policy reasoning behind these exceptions is that the rights of some parties should supersede the debtor’s protections in a bankruptcy proceeding.

In addition to these exceptions to the stay, the benefit of the automatic stay may be denied to debtors who have previously filed bankruptcy within a certain time frame. If a debtor files a second Chapter 7, 11, or 13 petition within a year, or the debtor re-files their petition within 1 year of having their case dismissed, they may be denied the stay protections. If the previous case was dismissed pursuant to Section 707(b) of the bankruptcy code, and the new filing is not a Chapter 7, the debtor may still be granted the stay within a year of the prior filing. Creditors may act and file a motion under Section 362(d) of the Bankruptcy Code if they believe their actions are excepted from the stay.

Violations of the Stay

If a creditor violates the automatic stay, debtors may be granted damages (including attorney’s fees). If the creditor violation is deemed to be particularly egregious, debtors can be granted punitive damages against the creditor. For a debtor to receive any damages for a stay violation, the creditor’s actions must be intentional with knowledge of the bankruptcy filing. If you are considering bankruptcy, contact the Indiana bankruptcy attorneys at McNeelyLaw to discuss your options.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.