Bankruptcy and the Automatic Stay

The moment a bankruptcy case is filed, a federal injunction is automatically entered to protect the debtor and his property. This is called the automatic stay.

A defendant declares bankruptcy to avoid a bad situation before it gets worse. As soon as this happens, the automatic stay prevents anyone from pursuing the lawsuit against the defendant. This is enforced whether anyone has received notice of the bankruptcy or not.

Any actions taken against the debtor in violation of the stay are null and void unless relief from the stay has been granted.

Sometimes the bankruptcy of one defendant in a multi-defendant case will stop the lawsuit all together. This benefits any other defendants in the case. This may hold true while the other parties try to figure out what to do next. Just remember that the injunction only protects the debtor.

What about those suing the debtor? It may be strategic to avoid going forward with the lawsuit all together.  However, there are generally two options:

• The litigants can try the claim in bankruptcy court.
• Litigants can seek relief from the automatic stay to try the case against the debtor and his co-defendants.

Once the automatic stay terminates, the debtor and the debtor's assets are now protected by something called a discharge or statutory injunction.  Generally, this prevents creditors from taking formal or informal action to collect on the pre-bankruptcy debt.  However, there can be exceptions.

When pursuing a business law matter or a lawsuit against an individual, it is helpful to have a general understanding of the impact of bankruptcy.  In most instances, this will impact how you move forward in a case, if you move forward at all.

If you have questions regarding a business law matter or a consumer matter and whether you should pursue the case, contact this office for an initial consultation.