What the Automatic Stay Can and Cannot Do in a Chapter 11

The automatic stay is an integral aspect of a Chapter 11 bankruptcy case. Taking effect immediately upon the filing of the petition, the stay temporarily halts creditors, collection agencies and government entities from pursuing actions against the debtor or the debtor’s property. It is designed to provide a breathing spell for the debtor, during which it can develop a plan to reorganize its finances without the pressure of multiple collection efforts.

The automatic stay prevents beginning or continuing legal proceedings against the debtor while the Chapter 11 is in progress. Creditors cannot take any of the following actions:

• Enforcing pre-petition judgments against the debtor or the debtor’s property
• Obtaining possession of or exercising control over property of the estate
• Creating, perfecting or enforcing any lien against property of the estate
• Creating, perfecting or enforcing any lien against property of the debtor to the extent that such lien secures a claim that arose before the commencement of the bankruptcy case
• Collecting, assessing or recovering a claim against the debtor that arose before the commencement of the bankruptcy case
• Setting off of any debt owing to the debtor that arose before the commencement of the bankruptcy case against any claim against the debtor

Despite its broad protective scope, the automatic stay is not absolute. Several exceptions are outlined in 11 U.S.C. § 362(b). The most common ones are:

• Criminal proceedings — The stay cannot be used to shield a debtor from criminal prosecution or from liability for fines or other economic penalties.
• Family law proceedings — The stay does not stop actions to establish paternity or to establish or modify orders for alimony, maintenance or child support.
• Perfection and enforcement of liens — The stay does not prevent the perfection, continuation or enforcement of liens within certain grace periods provided by law.
• Governmental police and regulatory powers — Actions by government entities to enforce laws related to public health, safety and welfare can continue. However, the enforcement of money judgments, including those arising from tax debts, remains stayed.

Unless terminated or modified, the automatic stay remains in effect until dismissal or closure of the bankruptcy case, such as through a discharge order. A stay also can terminate with respect to a specific property. Under certain circumstances, a secured creditor can obtain a court order granting relief from the stay, allowing the property to be sold to recoup debt due. 

The automatic stay can help protect the going-concern value of the debtor’s business while allowing the confirmation of a plan for manageable reorganization of debt. A skilled Chapter 11 attorney can advise you on making optimal use of the automatic stay in your case.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your company needs help with debt reorganization, call 310-271-6223 or contact us online to schedule a free consultation.