The “Automatic Stay” in a Bankruptcy case is the law that stops creditors (and other parties) from trying to collect debts from a debtor, trying to get the debtor’s property or trying to create or enforce a lien on the debtor’s property. It is found in Section 362(a) of the Bankruptcy Code and essentially freezes the action and gives a debtor some breathing room. The Stay is, as the name implies, “automatic” and effective the instant a Bankruptcy Petition is filed, whether or not creditors have actual notice of the Bankruptcy filing. If a creditor violates the automatic stay, even innocently, the action is considered void and the creditor normally has an obligation to “undo” what they have done. The Automatic Stay is one of the most powerful benefits in a Bankruptcy case and is normally used to stop foreclosures of homes, repossession of vehicles and the garnishment of paychecks and bank accounts. In Georgia, the largest filing day of the month (by far) is the day before the monthly foreclosure sale day.
The automatic stay is temporary and expires when the case is closed or dismissed, the Chapter 7 debtor receives a discharge, the property at issue is no longer property of the Bankruptcy estate, or when the Court has lifted the Stay after a motion from the creditor (normally called motions for relief from the automatic stay). After a discharge is entered, the Automatic Stay is effectively replaced by the Discharge Injunction, which prevents efforts to collect discharged debts. Special rules apply when a person has filed multiple cases. When the debtor had one prior case pending in the previous year the automatic stay expires 30 days after the current case is filed, unless extended by the Court. Courts are generally liberal in extending the stay if a debtor shows they will be able to make a good faith effort in the case. If two more more previous cases were pending in the last year, the automatic stay does not go into effect at all (with one exception) and the debtor will have to seek a Court order imposing the stay from a very skeptical judge. The purpose of this rule is to prevent people from continuously frustrating creditors’ rights to foreclose on property, continue a lawsuits, etc., with no good faith intent to proceed in the Bankruptcy case. Realistically, if someone has three or more cases in a year, it does indicate they have little or no chance at success in Bankruptcy. Often, they just file the basic Petition without a lawyer, and do nothing else in the case. In some cases, the Bankruptcy Court will enter an order prohibiting these “serial filers” from filing another case for six months, or providing that even if they do file again the automatic stay does not apply to certain property, such as real estate.
There are other exceptions to the Automatic Stay. Most commonly, it does not apply to paternity cases, cases to establish or modify domestic support obligations or those that concern child custody, or divorce cases (other than property division involving estate property). It also does not apply to many actions to suspend or revoke drivers licenses or professional licenses.
What happens if a creditor violates the automatic stay? If it was an innocent mistake, such as when the creditor had no knowledge of the case, they generally need to take steps to go back to where things were before the Bankruptcy case was filed. That might include giving back a repossessed vehicle or garnished funds. If the lender foreclosed on a home and sold it on the courthouse steps, the foreclosure sale is normally void and the debtor has to take no further steps. If, however, the creditor refuses to reverse their actions or violate the stay even though they have actual knowledge of the Bankruptcy filing, the Court can sanction them and award attorneys fees to the debtor. Although Courts are typically very lenient for innocent violations, they will come down hard on creditors who intentionally violate the law.
The Automatic Stay is arguably the second biggest benefit in a Bankruptcy case, just behind the discharge. To get the most out of the stay and the case, it is important to properly file all documents and meet all other requirements in the case. In addition, and perhaps most importantly, do not wait until the last minute to contact a lawyer and file the case. Not only will your choice of good lawyers be much more limited, you will have less time to do credit counseling and less time to get good advice on the case as a whole.