One of the most fundamental protections for companies or individuals filing for bankruptcy is the automatic stay. In fact, when someone says a company has sought "bankruptcy protection" they usually are referring to the "protection" of the automatic stay. The automatic stay arises the instant a bankruptcy petition is filed. It doesn’t matter whether the petition is a voluntary one filed by the company itself or an involuntary one filed by creditors seeking to force the company into bankruptcy.
The automatic stay operates as a stay — really a statutory injunction — against almost all collection actions by creditors against a debtor and its property based on debts existing before the bankruptcy petition was filed. It is called the automatic stay because this stay arises automatically when the petition is filed without the need for any court order. Among the actions stayed are:
- Repossessions of assets
- Foreclosure sales
- Collection calls and notices, and
- The making of setoffs.
Creditors should make every effort to avoid a violation of the automatic stay. Violating the automatic stay is serious business (even when the government does it). This is especially true if the debtor is an individual. Not only are actions in violation of the stay generally held to be void, but in some cases creditors can expose themselves to a claim for damages or even punitive damages.
Creditors can ask the bankruptcy court for relief from the automatic stay, for example to allow a lawsuit to continue or a foreclosure sale to take place. While such "relief from stay" is occasionally granted, more often the request is denied to give the debtor more breathing room to reorganize its business. In any event, seek assistance from a bankruptcy attorney if you have questions about or need relief from the automatic stay.