The automatic stay, set forth at 11 U.S.C. §362, is one of the most critical hurdles for creditors when their customers file for bankruptcy. The stay is generally immediately effective upon the filing of the debtor’s bankruptcy without the debtor taking any additional action. It prohibits, among other things:
- The commencement or continuation of a proceeding against a debtor based on claims that arose before the debtor filed for bankruptcy;
- The enforcement of a judgment obtained before the bankruptcy was filed;
- Non-litigation conduct to further collection of amounts due, including, but not limited to sending demand letters, garnishing wages and bank accounts, or repossessing the debtor ‘s property; and
- Creating, perfecting, or enforcing a lien on the debtor’s property.
Section 362 provides serious penalties for willful violation of the automatic stay, including actual damages, punitive damages and reasonable attorney’s fees. In order to proceed with a case that was pending at the time of the bankruptcy, the creditor must seek relief from the automatic stay under grounds set forth in the code.
The stay continues until the earlier of the time that case is closed or dismissed or a discharge is granted or denied. Note that even once the stay is over, however, there are other prohibitions against collection efforts such as if the debtor receives a discharge. Therefore, it is very important to tread carefully when working on collection efforts once a bankruptcy has been filed and to be aware of the limitations the automatic stay creates so as not to violate it.
