The effect of the automatic stay in bankruptcy

The effect of the automatic stay in bankruptcy

On Behalf of | Oct 21, 2022 | Bankruptcy |

Anyone who has been through a time of financial difficulty knows how unpleasant it can be to deal with a stream of calls from creditors or collection agents trying to collect past due obligations. Many people who are considering bankruptcy as a solution to their financial troubles often overlook one of the great benefits of the Bankruptcy Code: the automatic stay.

What the stay does

“Stay” is a legal term for a court order that prevents a party from taking a specified action against another party. When a person files a petition for relief with the bankruptcy court, the clerk in the court where the petition is filed is required to send notice of the automatic stay to all of the debtor’s creditors.

The purpose of the stay is the preservation of the debtor’s assets to ensure that all creditors have an equal chance for repayment. The stay explicitly prohibits any act to create or enforce any lien against property of the estate. This language effectively stops any proceeding to foreclose on a mortgage on the debtor’s homestead.

Creditors’ rights

A creditor may request relief from the stay if it can prove that it will suffer irreparable injury. If, for example, the collateral is a wasting asset such as an agricultural crop, the court may allow the creditor to proceed with a collection action.

Termination of the stay

The stay will terminate upon the entry of the order granting or denying relief to the debtor. The debtor has many options to protect his or her rights before the stay expires. A consultation with an experienced bankruptcy attorney can explain the details of these options.