Removing a Bankruptcy Automatic Stay

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Bankruptcy takes place in federal court and the proceedings follow a special set of guidelines called the Federal Rules of Bankruptcy Procedure. The law practiced in these special courts, which were established to assist debtors in 1978, is governed by the U.S. Bankruptcy Code.

The automatic stay provides many debtors with immediate relief because it prohibits creditors from continuing their collection efforts. It is activated as soon as a petition is filed under Title 11 of U.S. Code 362 of the Bankruptcy Code.

Automatic Stay Is an Injunction

Whether the petition is filed under Chapter 11, 7 or 13—by a corporation or individual—the stay acts as an injunction. However, there are exceptions depending on the type of claim. The benefit is that the stay applies to a creditor’s effort to collect on a debt that was incurred before the filing of the bankruptcy claim. It gives debtors some temporary peace of mind from all creditor entities, including the government and courts.

“One of the reasons individuals ultimately file for bankruptcy is just to stop the harassment that goes on in the process of collection,” says William L. Norton III, a Nashville-based partner and member of the Bankruptcy and Creditors' Rights Practice Group with Bradley Arant Boult Cummings.

What A Stay Freezes

In most cases, there is no written court order announcing the stay. Instead, it is the filing of the initial petition under the stay statute that automatically freezes debt collection efforts.

Even the enforcement of a monetary judgment—signed by another court’s judge—is put on hold once a debtor files a petition in bankruptcy court.

The stay suspends enforcement activities that include:

  • Garnishment of wages
  • Housing foreclosure
  • Divorce proceedings
  • Car repossession by a sheriff
  • Freezing of bank account
  • Robo-collection telephone calls

The stay remains activated until the bankruptcy petition is dismissed or if a federal judge grants relief from the stay to a creditor, which is only considered after a creditor files a motion to lift the stay.

Why Courts Lift the Automatic Stay

Although rare, a bankruptcy court may grant relief from an automatic stay under certain circumstances. For example, when a bank has a lien on a property but the value of it that are declared in a bankruptcy case is less than the declared debt, a bank can be allowed to proceed with foreclosure if there’s no equity in the property and the property is not part of a reorganization.

In the event of divorce proceedings taking place simultaneously in a state court, a federal bankruptcy judge may grant a partial stay, allowing for the determination of the necessity of a divorce but without property division.

A creditor's motion to lift the stay must clearly state the reason for the request and need for relief from the stay. However, if related litigation is cited as a reason, the court is less likely to lift the stay because the purpose of bankruptcy is to centralize debts.

Timing on Lifting a Stay

Since cases can move through the courts slowly, federal bankruptcy judges have 30 days to set a preliminary hearing for the motion and an additional 30 days to set a final hearing. Expediting a hearing on such a motion would depend on the value and type of collateral that's declared in the bankruptcy petition.

There are different procedures in circumstances of lawsuits and insurance claims or past-due car and house payments.

Since the automatic stay is federally imposed upon the filing of a debtor’s petition, the bankruptcy judge is in the first position to decide whether relief from a stay is granted. A judge would defer to another court only in the event of litigation related to the debts that are outside of the bankruptcy court’s expertise.

When Creditors Violate the Stay

Creditors are keeping more meticulous records to avoid being found in violation of the automatic stay once a bankruptcy petition is filed. If a stay is violated and determined to be willful and malicious, the creditor becomes subject to penalties and may even have to pay the debtor's attorney fees.

What Happens When the Case Is Dismissed

Once the case is dismissed, 11 U.S.C. 524, also known as the discharge injunction, begins to take effect where any collection action on the discharged debt is enjoined in the same way the automatic stay prohibited collection. The discharge injunction continues forever and applies to debt that’s unsecured. 

Student loans, however, are not dischargeable, which means that even when a graduate has filed for bankruptcy, once the case is closed, the student loan servicing agent can sue to collect.