How the Automatic Stay Works in Chapter 11

The automatic stay is a critical component of Chapter 11 bankruptcy, providing temporary protection against creditor actions and allowing the debtor to reorganize their financial affairs.

Key Features

1. Immediate Effect: The automatic stay goes into effect immediately upon filing a Chapter 11 bankruptcy petition, halting most collection activities against the debtor. 123
2. Scope: The stay applies to all creditors and collection agencies, preventing them from pursuing debt collection, foreclosures, and repossessions of property. 356
3. Duration: The automatic stay lasts until the court confirms the reorganization plan, dismisses the case, or converts it to another bankruptcy chapter. 145
4. Exceptions: Certain actions are not stayed, such as family law proceedings against a spouse or parent, and creditors may file for relief from the stay under specific circumstances. 45

Purpose

The automatic stay provides a "breathing spell" for the debtor, allowing them to stabilize their finances, negotiate with creditors, and propose a reorganization plan without the pressure of immediate collection actions. 123

Relief from Stay

Creditors can move to have the automatic stay lifted by demonstrating good cause to the bankruptcy court, such as showing that the collateral property lacks sufficient equity to cover the loan and that the debtor is not making required payments. 15

Consequences of Violation

Creditors who violate the automatic stay can be sued by the debtor, and the court may impose penalties for non-compliance. 35