Legal Definitions - automatic stay

The automatic stay is a powerful legal protection that immediately goes into effect the moment an individual or business files for bankruptcy. It acts as a temporary court order, or injunction, that stops most creditors from trying to collect debts from the person or entity who filed for bankruptcy. Its primary purpose is to give the debtor a crucial pause from collection efforts and allow the bankruptcy court to manage the debtor's assets in an organized way, free from interference by individual creditors.

This "stay" prohibits a wide range of collection activities, including lawsuits, foreclosures, repossessions, wage garnishments, and persistent collection calls. While generally broad, there are specific exceptions where certain actions are still permitted, and creditors can sometimes ask the bankruptcy court to lift the stay if they can demonstrate specific legal grounds, such as their collateral not being adequately protected.

• Example 1: Halting a Lawsuit and Wage Garnishment

  Imagine Sarah has fallen behind on her medical bills and a collection agency has successfully sued her, obtaining a court order to garnish her wages. Just as her employer is about to implement the garnishment, Sarah files for Chapter 7 bankruptcy. The moment her bankruptcy petition is filed, the automatic stay immediately takes effect, stopping the wage garnishment and preventing the collection agency from pursuing any further legal action against her for that debt.

• Example 2: Preventing a Foreclosure Sale

  David and Maria are struggling to make their mortgage payments, and their bank has scheduled a foreclosure auction for their home next week. Desperate to save their house or at least gain more time, they file for Chapter 13 bankruptcy two days before the scheduled sale. The automatic stay instantly halts the foreclosure process, preventing the bank from selling their home and giving David and Maria an opportunity to propose a repayment plan through the bankruptcy court.

• Example 3: Creditor Seeking Relief for a Depreciating Asset

  A small construction company, "BuildRight Inc.," files for Chapter 11 bankruptcy. Among its assets is a specialized piece of heavy machinery, financed by "Equipment Lenders Corp." After the bankruptcy filing, the automatic stay prevents Equipment Lenders from repossessing the machinery. However, the machinery is rapidly losing value due to constant use and lack of maintenance. Equipment Lenders Corp. can petition the bankruptcy court for "relief from the automatic stay," arguing that their interest in the collateral is not adequately protected because the asset is depreciating quickly. If the court agrees, it might allow Equipment Lenders to repossess the machinery despite the ongoing bankruptcy.