Many residents of Pennsylvania view bankruptcy as a financial cataclysm: their assets will be repossessed by creditors, and they will lose their home and many other assets. This view is incorrect: bankruptcy is designed to give petitioners a chance at financial survival. One of the greatest protective tools in bankruptcy is the automatic stay, a statutory provision that most people know very little about.
What is the automatic stay?
The automatic stay is a provision of the United States Bankruptcy Code that halts all collection activity by creditors from the moment the petition is filed with the court until the proceeding is ended by an order from the judge. A stay is a court order prohibiting or halting the conduct described in the order. One of the exhibits that must accompany the bankruptcy petition is a list of all the petitioner’s creditors and their addresses. When the petition is filed with the court, the clerk immediately prepares an order for the automatic stay using a form approved by the bankruptcy judges in that district. The stay order is sent to every creditor on the list furnished by the bankruptcy petitioner. The stay applies both to court proceedings and out-of-court efforts to collect a debt.
What does the stay do?
The order for the automatic stay directs every one of the petitioner’s creditors to immediately cease all pending actions that are intended to recover on a debt owed by the petitioner to the creditor. These debts include any liens on the debtor’s property, service of process to collect a debt, enforcement of an earlier judgment, and many others. The automatic stay does not apply to any action to determine paternity, any order for domestic support, or any action concerning domestic violence. The automatic stay also stops foreclosure proceedings and keeps the debtor and his family in their usual residence.
Penalties for violating the stay
Any creditor who fails to obey the stay may be subject to a heavy penalty from the bankruptcy court. Creditors can also ask the bankruptcy court to lift the stay if it can show good cause for such an action.
Anyone contemplating filing a bankruptcy petition may wish to consult an experienced bankruptcy attorney for advice on the applicability of the stay and the effect of the numerous exceptions to the stay.