In bankruptcy law, an automatic stay is an automatic injunction that halts actions by creditors, with certain exceptions, to collect debts from a debtor who has declared bankruptcy. Under section 362 of the United States Bankruptcy Code, 11 U.S.C. § 362, the stay begins at the moment the bankruptcy petition is filed. Secured creditors may, however, petition the bankruptcy court for relief from the automatic stay upon a showing of cause. As noted in a Senate Report:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

Notes of Committee on the Judiciary, Senate Report No. 95-989.

For example: a creditor with a claim that arose before commencement of the bankruptcy case cannot contact the debtor requesting or demanding payment, cannot request from the debtor security for existing unsecured or undersecured debt, cannot initiate a lawsuit against the debtor or pursue litigation activities in a pending lawsuit against the debtor, cannot attempt to enforce a judgment against the debtor and must act to stop enforcement activities that are already in motion (e.g. notify a sheriff to stop a wage garnishment or to refrain from a scheduled execution sale), cannot perfect a lien against property of the estate, cannot repossess collateral that is property of the estate, and cannot initiate or pursue non-judicial or judicial foreclosure against property of the estate.

This debtor protection is truly automatic. No hearing is held, no judge's signature required. It is invoked simply by the stamp of the bankruptcy clerk's time clock when a petition is presented for filing. Creditors are bound by the automatic stay even before they know of it, but sanctions attend only wilful violations (see Bankr. Code 362(h)).

     There are some exceptions to the automatic stay (see Bankr. Code 362(b)) and the stay does not preclude a creditor from taking action against any entity other than the debtor (e.g. a co-debtor, guarantor, or insurer).

     The automatic stay is temporary. It terminates automatically upon the occurrence of specified events (see Bankr. Code 362(c)). Also, upon an appropriate showing in a noticed hearing in bankruptcy court, creditors may obtain relief from the stay that either annuls, terminates, or modifies the stay, or conditions continuance of the stay upon certain events, such as interim payments by the debtor to the secured creditor (see Bankr. Code 362(d) and Bankr. Code 361). A secured creditor may seek relief from the stay in order to pursue its state law rights against the collateral or may seek relief from the stay as a way to force a debtor to make interim payments to the secured creditor as a condition to the stay remaining in effect. 

Relief from stay in a consumer Chapter 7

     Creditors secured by liens on personal property do not often seek relief from the automatic stay in a consumer Chapter 7 case.  With respect to much of the collateral securing debt in a consumer Chapter 7 case - - an automobile, household furnishings, or jewelry - - other solutions are common: (1) the debtor continues payments of the secured debt, uninterrupted by the filing of the bankruptcy petition; or, (2) the debtor reaffirms the secured debt and begins making payments under the reaffirmation agreement; or, (3) the debtor redeems collateral from the lien; or, (4) the debtor surrenders the collateral to the secured creditor.  If the debtor does none of the above, the creditor may simply wait until the grant of discharge and then pursue its state law remedies against the collateral.

     A secured creditor of a Chapter 7 debtor is most likely to seek relief from stay and not await automatic termination of the stay in three situations:

     (1) When property of significant value, such as an automobile, is uninsured or is otherwise subject to unacceptable risk;

     (2) When property of significant value, such as an automobile, is depreciating rapidly and the creditor has reason to believe that the debtor will not promptly surrender the collateral, reaffirm the debt secured by the collateral, or redeem the collateral from the lien;

     (3) When the creditor holds a consensual lien on a debtor's residence and the debtor has defaulted on mortgage payments and appears unable to maintain continuing mortgage payments or promptly cure arrearages. 

Relief from stay in Chapter 13

     A secured creditor of a debtor in Chapter 13 (except a creditor secured only by a lien on real property used as the debtor's principal residence) faces the prospect of a repayment plan forced upon it if the bankruptcy court confirms the debtor's plan. Confirmation usually follows the filing of a petition by fewer than six months. Thus, unless the secured creditor is concerned about uninsured property having significant value, or unless the secured creditor seriously doubts the likelihood of prompt confirmation of a plan, the expense of seeking relief from stay may not justify the benefit. Moreover, as suggested by In re Radden, it may be difficult for the secured creditor to prevail on a motion seeking relief from stay.

     As in a Chapter 7 case, a secured creditor with a consensual lien on a Chapter 13 debtor's residence will often seek relief from stay in order to foreclose if the debtor is in arrears on mortgage payments and if it appears unlikely that the debtor will be able to fund a plan that both cures arrearages and maintains ongoing mortgage payments.

A bankruptcy petition, once it is filed, immediately operates as an automatic stay, holding in abeyance various forms of creditor action against the debtor. Automatic stay provisions work to protect the debtor against certain actions from the creditor, including: (1) beginning or continuing judicial proceedings against the debtor, (2) actions to obtain debtor's property, (3) actions to create, perfect or enforce a lien against a debtor's property, and (4) set-off of indebtedness owed to the debtor before commencement of the bankruptcy proceeding.

A court may give a creditor relief from the stay if the creditor can show that the stay does not give the creditor "adequate protection" or if it jeopardizes the creditor's interest in certain property. The court may give relief to the creditor in the form of periodic cash payments or an additional or replacement lien on the property.

Concerned that debtors may exploit some of the advantages of automatic stay provisions, Congress provided some relief to certain creditors, such as those creditors who have a secured interest in a single real estate asset, from the automatic stay in 1994. Congress required such debtors to either file a plan that has a reasonable chance of being accepted within a reasonable amount time or to make to each such secured creditor monthly payments in the amount equal to interest at a current fair market rate on the value of the creditor's real estate.

Also in 2005, Congress added two more exceptions to the automatic stay provisions. These exceptions concern landlords seeking to evict tenants. First, any eviction proceedings in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition may be continued. Second, eviction proceedings filed after bankruptcy proceedings are exempt from the automatic stay if they involve evicting the tenant on the basis of using illegal substances or "endangerment" of the property.

Pursuant to the new provisions of BACPA, certain restrictions were added to section 362 as to the automatic stay. If the debtor had a case dismissed in a case pending during the year before the bankruptcy case was filed, the automatic stay will expire to a certain extent unless the debtor obtains an order extending it within one month. If the debtor had two cases pending in the year prior to filing, the automatic stay does not go into effect unless the debtor files a motion.