9. What is the automatic stay in bankruptcy?
The automatic stay under Section 362 of the Bankruptcy Code protects debtors from ongoing collection efforts (during the pendency of the bankruptcy case) against property included in the bankruptcy estate. Specifically, creditors are prohibited from the following conduct:
• efforts to collect, assess, setoff, or recover a claim against a debtor arising before the bankruptcy filing;
• commencing or continuing a judicial, administrative, or other action to collect the debt;
• enforcing a judgment against the debtor’s property;
• obtaining possession or control over assets included in the bankruptcy estate; or
• creating, recording, or enforcing a lien against the debtor’s property.
Some limitations to the protections afforded under section 362 include:
• commencement or continuation of criminal actions and certain actions for domestic support;
• commencement or continuation of actions by governmental units pursuant to its regulatory power (such as tax liability); or
• creation or perfection of a statutory lien for certain types of real property.
The stay of proceeding will continue until the case is closed, dismissed, or discharge is granted. The court may also relieve or modify a stay generally or for a specific creditor for cause, for lack of adequate protection of a secured creditor’s interest, or if the debtor has no equity in the subject property and it is not necessary for the reorganization of the debtor’s estate. If a debtor violates a stay, any collection action can be undone. Further, if a debtor willfully violates the stay, the debtor may recover any attorney’s fees incurred in challenging the collection action, as well as potential punitive damages.
• Discussion: Why do you think the bankruptcy code provides the above-referenced protections under section 362? Are these protections adequate? Why or why not? Does the ability of the bankruptcy court to modify the 362 stay provision affect your opinion? Does this provision adequately protect debtor interests?
• Practice Question: ABC Corp files for bankruptcy protection. 123 Corp is a debtor of ABC with a security interest filed in several pieces of ABC’s equipment. 123 wants to understand its right to seek collection of the debt against ABC, including repossessing the equipment securing the debt. Can you explain the limitations on 123’s ability?