What is an Automatic Stay?

Malcolm Tatum

An automatic stay is a court action that prohibits creditors from contacting a debtor once he or she has filed for bankruptcy protection. An injunction of this type helps to stop any type of collection efforts that are taking place, as well as prevent collateral seizure or the continuing process of telephone calls and written notices from creditors, demanding payment. The stay remains in place throughout the bankruptcy proceedings, although the court has the ability to modify or even terminate the stay at any time it deems appropriate.

Filing a bankruptcy petition grants an automatic stay preventing creditors from contacting a debtor.
Filing a bankruptcy petition grants an automatic stay preventing creditors from contacting a debtor.

The automatic stay is part of normal bankruptcy procedures in most countries around the world. This is true with all types of bankruptcy protection, including Chapter 7, 11, and 13 bankruptcies. In each case, the court takes action to notify each creditor listed in the documents filed with the court of the impending bankruptcy, and advises them to cease all contact with the creditor. This action has the effect of stopping the flow of telephone communications, letters and other means of communication demanding payment and threatening legal action. In some nations, the automatic stay also effectively freezes the application of additional collection fees and interests to the debtor’s accounts, thus preventing the debt from growing during the bankruptcy proceedings.

There is usually a short window of time between the filing of the bankruptcy and the court’s formal notification to the creditors. During this interim period, the debtor is normally instructed to inform each creditor who contacts him or her of the impending bankruptcy, and to provide contact information that can be used to verify the status of the filing. In most cases, this means providing the creditor with the name of the attorney who is handling the matter, although in some jurisdictions the process involves providing the creditor with contact information for the court of jurisdiction.

Once the creditor has been advised of the pending action and the automatic stay, he or she can no longer demand payment from the debtor. This includes telephone calls to the debtor at home or at work, or letters demanding payment for the outstanding debt. Any actions by collection agencies on behalf of the creditors must also cease. In the event that collateral is involved with any of the debts included in the bankruptcy filing, an automatic stay prevents the creditor from making attempts to seize the collateral. Unless the court chooses to amend the terms of the automatic stay, the creditor is to have no more direct interaction with the debtor. All communications regarding the status of the debts must be routed through the court of jurisdiction.

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