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The Automatic Stay

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Brief History of the Automatic Stay

The Automatic Stay was not always around. Prior to enactment of the Bankruptcy Reform Act of 1978, there was no automatic stay and a stay would only be granted under limited circumstances (and often dependent on court approval). As such, those wanting to restrain creditor rights were often required to petition for restraining orders in state court (i.e., foreclosures). Because decisions varied from jurisdiction to jurisdiction, this process resulted in increased expense and unpredictability.


During the Bankruptcy Reform Act era, an individual debtor could pay $175.00 to immediately obtain a stay of almost any creditor action, anywhere in the country, by filing a bankruptcy petition. No consent was needed and no court order had to be obtained. This pulled creditors into bankruptcy court to defend and resolve their rights.

The Automatic Stay Today

Today, bankruptcy practitioners practice under the governance of BAPCPA 2005. Although there are now stay limitations imposed on repeat filings, this section will focus more on the automatic stay generally, its application, and violations.

1. Generally

A petition filed under the Code operates as a stay of proceedings, actions or acts against the debtor or property of the estate. The stay terminates when the property is no longer debtor’s property or property of the estate, when the case is closed or dismissed, or when an individual is granted a discharge. A party may file a motion seeking relief from the automatic stay, which if successful, will terminate the stay unless the court orders such stay continued.

Section 362(a) may generally be said to apply to almost all types of creditors and others against the debtor and the debtor’s assets. There is even a special co-debtor stay in chapter 13 cases. The court has ample powers to augment the automatic stay with injunctive relief in the appropriate circumstances. This power to issue stays of action against the property of the estate is independent of the automatic stay and as such, the trustee or any party in interest may seek appropriate injunctive relief from the court. Section 105(a), 28 U.S.C. Section 1491; See also “All Writs Statute,” 28 U.S.C. Section 1651(a).

The stay of section 362(a) is automatic and is effective worldwide without notice. In most cases actions taken after the filing of the petition, even if in good faith and without notice, will be either voidable or void. Such, even an innocent party is in no position to refuse to thereafter comply and undo the effect of the action unless the bankruptcy court orders otherwise. However, section 342 provides that a monetary penalty may not be imposed for violation of the stay unless the conduct in question occurs after the creditor receives notice effective under section 342.

Nevertheless, the goal of the trustee and debtor’s counsel is compliance, and as such, appropriate notice should be given to interested parties. Experienced debtor’s counsel prepare a form of notice of automatic stay. While not a formal pleading, it has the practical effect of slowing creditor action.

2. Application

The stay applies to all entities and prevents
 
  • The commencement or continuation of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commended before the commencement of the case under the Bankruptcy Code, or to recover a claim against the debtor that arose before the commencement of the case under the Bankruptcy Code.
  • The enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under the Bankruptcy Code.
  • Any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.
  • Any act to create, perfect, or enforce any lien against property of the estate.
  • Any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under the Bankruptcy Code.
  • Any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under the Bankruptcy Code.
  • The setoff of any debt owing to the debtor that arose before the commencement of the case under the Bankruptcy Code against any claim against the debtor.
 
3. Violations

Aside from its powerful effect on creditor actions, the automatic stay allows a court great power to punish those who violate it. Actions taken in violation of the automatic stay are void, not just voidable. Schwartz v. United States (In re Schwartz), F.2d 569 (9th Cir. 1992). An individual injured by any willful violation (knowledge and intent) of a stay can recover actual damages, including emotional distress, costs and attorneys’ fees, and, in appropriate circumstances punitive damages. 11 U.S.C. §362(k)(1). Snowden v. Check into Cash of Wash., Inc. (In re Snowden) 769 F.3d 651, 657 (9th Cir. 2014).

A willful violation of the automatic stay does not require specific intent to violate the stay, only that the party knows of the stay and thereafter takes intentional actions. Generally, attorneys’ fees are not allowed for actions taken after the stay violation has been remedied. However, Schwartz-Tallard v. America’s Servicing Co., 751 F.3d 966 (9th Cir. 2014), ruled in favor of such fees for debtor’s defense of a lender’s appeal relating to a stay violation.

Conclusion

The automatic stay is in fact automatic immediately upon the filing of a bankruptcy petition. The stay is broad and applies to almost all types of creditor actions. The stay was intended to provide a “breathing spell” for the debtor from creditor harassment. If a willful stay violation is found, a debtor is entitled to actual damages, including emotional distress, attorneys’ fees and costs, and, in certain situations punitive sanctions.

The automatic stay is powerful and a well-informed debtor will be able to take full advantage of all its protections.

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Facts

LawCrossing Fact #17: The “FAQ” section lists a large variety of commonly asked questions that LawCrossing users might have along with helpful answers.

 

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