Persons who are drowning in debt often hear that filing a petition in federal bankruptcy court can rid them of debt and provide a fresh financial start. How can a federal statute provide such relief? The answer begins with an understanding of the “automatic stay” issued by the bankruptcy court and ends with an understanding of the kind of relief that the bankruptcy court can offer to a person who is truly bankrupt.
What is the “automatic stay”?
A stay is an order issued by a trial judge that prohibits certain actions by the subject of the stay. According to the Bankruptcy Code, the court having jurisdiction over the bankruptcy proceeding must automatically issue an order to all of the petitioner’s creditors preventing them – or “staying” them – from taking any action to collect a debt allegedly owing to the creditor.
The stay is effective from the date of its issuance – usually a date close to the filing of the petition – and extends until the bankruptcy proceeding is complete or otherwise dismissed by the court. The automatic stay extends to collection lawsuits, actions to foreclose a lien on real or personal property, or any other action intended to enforce a claim against the debtor.
In this manner, the automatic stay halts all efforts to enforce claims against the debtor and provides immediate relief from existing collection actions.
Exceptions to the automatic stay
The automatic stay does not extend to debts related to the failure to pay taxes, lawsuits to establish paternity, disputes involving child custody or visitation, for the dissolution of marriage, or an action that involves the debtor’s obligation to pay a domestic support obligation. The stay is also limited by other provisions of the Bankruptcy Code.
In most cases, the automatic stay remains in effect until the bankruptcy proceeding is concluded. If the court finds that the petitioner is in fact bankrupt, it will issue an order discharging most of the debts owed by the petitioner. The automatic stay will thus have played a major role in protecting a petitioner from troublesome collection actions.
Relief from the stay
The Bankruptcy Code also specifies the grounds on which the Bankruptcy Court can grant relief from the stay for cause proved by the creditor or if the debtor has filed a plan of reorganization that has a “reasonable probability” of being confirmed within a reasonable time.
The section of the Bankruptcy Act dealing with the automatic stay is long and complex and has a number of qualifying clauses. Whether a party to a motion to lift the stay is a creditor or a petitioner, the assistance of an experienced bankruptcy attorney is almost a necessity.
