The Automatic Stay: What Every Lawyer Should Know
| Publication year | 2022 |
| Pages | 0395 |
By Judge Clifton R. Jessup, Jr.
The automatic stay of Section 362(a) of the Bankruptcy Code gives a clear prohibition against collection activity after a bankruptcy case is filed. Because bankruptcy can intervene into many other areas of the law, every lawyer, even ones who never practice in the bankruptcy courts, should be aware of the general provisions outlined in this article so that they and their clients can avoid violating the automatic stay. Although this article contains a summary of key provisions of which every lawyer should be aware, it is not intended to provide an exhaustive treatment of the automatic stay, nor is it indicative of how the author may rule on any issue involving the automatic stay in a specific case.
The Automatic Stay Is a Federal Injunction Which Goes Into Effect Immediately Upon the Filing of Any Bankruptcy Petition
The bankruptcy injunction - called the automatic stay - has unique properties that differ from court-ordered injunctions.1 Court-ordered injunctions do not arise until a plaintiff files a motion and the issuing court determines that the relief sought is appropriate - they are not automatic. In contrast, because the automatic stay is a federal injunction imposed by congressional mandate, no judicial action is required for the stay to become effective.2 The automatic stay arises by operation of law the moment any bankruptcy petition is filed.
The Automatic Stay Generally Prohibits the Commencement or Continuation of Any And All Actions to Collect a Prepetition Debt
Pursuant to the Bankruptcy Code, the filing of a bankruptcy petition has certain immediate consequences, including the imposition of the automatic stay which stays the commencement or continuation of virtually all judicial proceedings. Generally, pending state court litigation must be put on hold the moment the debtor files a bankruptcy petition. Certain litigation is exempted from this rule, as this article will address later.
Filing a bankruptcy petition also initiates the stay of any act to recover prepetition debts owed by the debtor. Essentially all collection activities must be immediately suspended when a bankruptcy petition is filed.3 Accordingly, all creditor efforts to collect debts that were owed before the bankruptcy case was filed must stop. Fundamentally, the automatic stay is intended to maintain the status quo as it existed at the time the bankruptcy case was filed.
The Automatic Stay Benefits Not Only Debtors in Bankruptcy, But Also Creditors
In implementing the automatic stay, Congress sought to support the two core concepts in the Bankruptcy Code, which are: (i) to provide debtors with a fresh start, or the basic means of survival; and (ii) to ensure the equality of distribution among unsecured creditors. Congress was unequivocal in its stated intent that the stay must provide the debtor with breathing room from the financial distress that first drove the debtor to seek bankruptcy relief by immediately stopping "all collection efforts, all harassment, and all foreclosure actions."4
The commencement of a bankruptcy case also creates a bankruptcy estate, which is the basis for payment of creditors.5 The bankruptcy estate includes essentially all the non-exempt property owned by the debtor as of the petition date and all of the debtor's rights to property.6 Without the stay, creditors would be able to pursue their own remedies against the bankruptcy estate, and those who acted first would obtain payment in preference to and, to the detriment of, other creditors.7 Thus, the stay both provides the debtor with an opportunity for a fresh start while facilitating the orderly distribution of assets to creditors by avoiding the race to the courthouse.
Any Action Taken in Violation of the Automatic Stay Is Void or Voidable
There is a split between the circuits concerning whether actions taken in violation of the stay are void or merely voidable.8 An action that is void is without effect, whereas an action that is voidable takes effect unless objected to.9 However, in the Eleventh Circuit, an action taken in violation of the automatic stay is void and without effect.10 Because the automatic stay arises the moment a case is filed, and is effective, regardless of notice, any act that violates the stay is "void ab initio."11 Thus, collection activity taken after the stay arises has no legal effect.
There are Specific Exceptions From the Operation of the Automatic Stay, Including Domestic Support Obligations, The Exercise of Police and Regulatory Powers, and Negotiable Instruments
All proceedings against a debtor are immediately stayed upon the commencement of a case, unless the action falls under one of the enumerated exceptions listed in 11 U.S.C. § 362(b) of the Bankruptcy Code. For example, various family law proceedings are excepted, including the commencement or continuation of an action: (i) to establish paternity; (ii) to establish or modify an order for domestic support; (iii) to establish child...
To continue reading
Request your trial