What is an "Automatic Stay," and Why is it So Important to a Person Filing for Bankruptcy?
It's not just the presence of unmanageable debt that sends people into bankruptcy; it's the constant harassment and collection efforts of creditors. Companies and bill collectors go to great lengths to get what they owe, including harassing phone calls, visits to your home or workplace, wage garnishment, property repossession, home foreclosures, and lawsuits. One of the most attractive features of bankruptcy, therefore, is the automatic stay. As the name implies, the automatic stay puts an immediate hold on collection activities once you file for bankruptcy. Creditors have to wait until the bankruptcy is over to resume collection activity, and by that time, the bankruptcy court may have already discharged the debt. Creditors can request relief from the stay by asking the bankruptcy court to lift the stay so they can proceed with a lawsuit or other collection effort, even while the bankruptcy is pending. The timing of this motion is critical to its success or failure, as a recent case in the United States Supreme Court illustrates.
The automatic stay is a bedrock bankruptcy provision
The automatic stay can be found in section 362 of the U.S. bankruptcy code. According to subsection (a), filing a bankruptcy petition operates as a stay of "the commencement or continuation" of a lawsuit against the debtor as well as any action to collect on a judgment that was already obtained against the debtor. This stay remains in effect until the bankruptcy case is closed or dismissed, a discharge is granted or denied, or the property in question is no longer part of the bankruptcy estate.
Subsection (d) of section 362 covers the relief from stay. This subsection allows a party to requests relief from the stay for several different reasons and directs the court to lift the stay if the party proves the required criteria in a hearing.
Supreme Court decides important case on the automatic stay in bankruptcy
On January 14, 2020, the United States Supreme Court decided Ritzen Group, Inc. v. Jackson Masonry, LLC, ruling on a technical yet important question regarding motions for relief from the automatic stay. In this case, Ritzen sued Jackson for breach of contract, but Jackson filed for bankruptcy just before the trial was about to start, triggering the automatic stay. Ritzen filed a motion for relief from the stay, but the court denied Ritzen's motion. Instead of immediately appealing this denial, Ritzen went ahead and filed a proof of claim as a creditor against the bankruptcy estate, but the bankruptcy court disallowed this claim. Only then did Ritzen appeal the court's order denying Ritzen relief from the stay. The court denied Ritzen's appeal as untimely, and Ritzen appealed that ruling all the way to the Supreme Court.
In a unanimous decision, the Supreme Court held that the bankruptcy court's order denying relief from the automatic stay was immediately appealable, meaning Ritzen only had 14 days to file an appeal under court rules. Ritzen's appeal was, therefore, untimely and could not be heard.
