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How the automatic bankruptcy stay protects a debtor

On Behalf of | Oct 20, 2022 | Bankruptcy

Perhaps the most troubling and worrisome aspect of being financially strapped is the seemingly unending stream of calls from creditors or their agents attempting to obtain payment for a past due obligation. Understanding the mechanics of a provision of the Bankruptcy Code referred, to as the “automatic stay,” may help a few people resolve their doubts and file a petition under either Chapter 7 or Chapter 13 to obtain relief from their debts.

The basics of the automatic stay

As prescribed by Section 362 of Chapter 11 of the United States Code, the filing of a petition under either Chapter 7 or Chapter 13 operates as a stay applicable to all of the debtor’s creditors. A “stay” is a technical term for a court order that halts specified conduct by a party to a lawsuit. Upon receiving the petition, the clerk of bankruptcy court is automatically required to send notice of the stay to all of the debtor’s creditors identified in the petition.

The stay applies to all actions to create or enforce a lien against the debtor’s property (including the garnishment of the debtor’s wages) and stops all collection actions, including court actions and non-judicial efforts to collect a debt.

The penalties for violating the stay can be very harsh, and virtually all creditors abide by the court’s order.

The rationale for the stay

The automatic stay may appear to give the debtor an unfair advantage, but the reasons for issuing the stay are straightforward. The stay is intended to prevent any creditor from taking advantage of the other creditors by continuing collection activities after the bankruptcy petition is filed. In creating a level playing field, the automatic stay is intended to give every creditor an equal opportunity to recover its money or asset from the debtor.

Relief from the stay

Any creditor may petition the court for relief from the stay under any of several provisions of the provisions governing the automatic stay. The statutory provisions governing the issuance of the stay and the numerous exceptions are complex and usually require the assistance of an experienced bankruptcy attorney.