Monday, September 21, 2009

Automatic Stay and Injunction

The Bankruptcy Code provides certain limitations on creditors attempting to collect prepetition debts after a bankruptcy case is filed. The two most significant limitations relate to the “automatic stay” and the “discharge injunction.” Bankruptcy’s stay and injunction provisions affect state proceedings far more often than most any other sections of the Code. Extensive changes were made to the bankruptcy stays by the 2005 amendments.

In a nutshell, bankruptcy stays generally prohibit creditors from attempting to collect prepetition debts while the bankruptcy case is pending. On the other hand, a bankruptcy discharge injunction generally prohibits creditors from attempting to collect prepetition debts after the bankruptcy case is closed. Sanctions and fees are statutorily provided for and could be awarded against the intentional or unintentional creditor who violates the Code provisions.

Bankruptcy stays principally arise out of Section 362, 1301, and 524. Section 362 applies to all bankruptcy cases and provides for a comprehensive stay to arise immediately and automatically upon the filing of any bankruptcy petition. Unlike a state court TRO or injunction motion, the Bankruptcy Code does not require either a motion or hearing; the injunction is automatic and immediate.

The 2005 amendments carve out a narrow exception to the general rule that an automatic stay arises upon the filing of a bankruptcy petition. This exception applies to debtors who have had two or more cases dismissed within the year before the petition is filed. In such cases, no stay arises automatically when yet another petition is filed.

Section 1301 also involves an automatic stay, but only applies to chapter 13 cases. Such a stay would only protect individuals who, although not co-debtors, are co-obligors with the debtor with respect to consumer debt.

Section 524 provides that the grant of a bankruptcy discharge operates as an injunction against the commencement or continuation of an action, the employment of process, or an act to collect, recover or offset any discharged debt as a personal liability of a debtor. Although the Section 524 injunctions arise automatically, they do not arise on the filing date of the petition, but only if and when the court grants the debtor a discharge. Source: American Bankruptcy Institute.

Warmest Regards,

Bob Schaller

Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

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