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Understanding the Automatic Stay in Bankruptcy

Updated: Mar 30


One of the most powerful and some might say the most powerful part of the Bankruptcy process is the Automatic Stay and its effect on the whole Bankruptcy process. Although there are certain unique situations where the Automatic Stay does not apply, when it does, most adverse actions against a debtor ceases and are suspended for the duration of the Petition Processing Period.


First, we must examine what an Automatic Stay is. It is actually a Court Order that goes into effect as soon as you file your Bankruptcy Petition. The Automatic Stay automatically protects you from certain actions by your creditors. So, once you file, this “STAY” goes into effect ”AUTOMATICALLY” without any formal action by the Bankruptcy Court or the Bankruptcy Trustee.

Creditors are stopped in their tracks because simply put MOST debt collections efforts are frozen or “Temporarily Suspended” while your Bankruptcy case is processed within the Bankruptcy Court System. Thus, while your Bankruptcy Petition is in Pending Status, all collection actions must go thru the Bankruptcy Court with only a very few exceptions.


The rational behind the law creating the Automatic Stay is that it was and is intended to give the debtor a break or a “breathing spell” from the pressure of dealing with their debts. For some, this break or suspension from pressure is a welcomed blessing. Don’t forget that while the Stay is in effect, debtor assets and debts are not changed at all. This preserves debtor position or the Status Quo until the bankruptcy is over.


In a Chapter 7 bankruptcy case, the Automatic Stay ensures that debtor assets are preserved for action by the Bankruptcy Trustee. Don’t forget, that it’s the Trustee who (applying the rules of the Bankruptcy system) decides what property or assets you (the debtor) will be able to keep and which assets are to be sold off to pay creditors.


The bankruptcy system classifies your assets as either Exempt or Non-Exempt. If an asset is considered Exempt, it will not be liquidated or sold off to pay creditors. If, on the other hand an asset is considered Non-Exempt, it will be liquidated and sold off to pay your creditors. The Bankruptcy System provides for the classification of your assets and spells out which ones will be sold and which ones will not.


The Bankruptcy Trustee takes and sells (liquidates) all assets that are Non-Exempt by arranging for their sale. The Trustee then oversees the division of any proceeds (cash) from your sold off assets and distributes the proceeds to your creditors.


All of this activity happens during the Automatic Stay which starts the moment you file your Bankruptcy Petition. . The Bankruptcy Estate is preserved or frozen during the Automatic Stay period for actions by the various parts of the Bankruptcy process. The Debtor, Creditors and any and all interested parties must let the Bankruptcy process progress until conclusion. Thus, the Automatic Stay is a central and very important part of Bankruptcy Process.

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