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Why is an automatic stay created when bankruptcy is filed?

Los Angeles, CA |

What purpose does this serve? Who benefits from the stay?

Attorney Answers 3


  1. The purpose is to provide the protection as in "filing for bankruptcy protection". It gives a debtor the chance to take his or her or its breath when faced with collection activity from numerous sources or from one or two sources who could put a debtor out of business or assetless.

    Besides serving the to protect the debtor, the stay also protects other creditors so that they all share equally in the distribution of assets to pay claims and settle debts. Otherwise, some creditors will get more than an equal share of assets simply because they won the proverbial race to the courthouse.

    Also, think of corporate debtors -- without the stay, companies might have their bank accounts frozen and paychecks and other bills would not be honored. Giving the debtor protection in those circumstances protects more than just the debtor; it protects the business enterprise including employees and vendors.

    The concept of the automatic stay is perhaps the greatest power conferred by the bankruptcy code.


  2. Everyone benefits from the stay becaause it protects property of the estate. One credditor cannot gain a superior position over creditors of the same class AND it protects the debtor from actions that would remove property from the estate or subvert the aapplication of the exemptions of that State.

    Disclaimer: This answer does not constitute legal advice. I am admitted in the States of New York, New Jersey and Massachusetts only and make no attempt to opine on matters of law that are not relevant to those three States. This advice is based on general principles of law that may or may not relate to your specific situation. Facts and laws change and these possible changes will affect the advice provided here. Consult an attorney in your locale before you act on any of this advice. You should not rely on this advice alone and nothing in these communications creates an attorney client relationship.


  3. Under 11 U.S.C. section 362, an “automatic stay” arises when a petition is filed under any chapter of the Bankruptcy Code. No hearing, notice or order is required before the automatic stay goes into effect.

    The automatic stay is a cornerstone of the Bankruptcy Code. The policy behind section 362 is to protect the estate from being depleted by creditors’ lawsuits and seizures of property before the trustee has had a chance to marshal and distribute the assets.

    The automatic stay is also intended to give debtors breathing room by stopping all collection efforts, all harassment, and all foreclosure actions. The scope of the automatic stay is very broad.

    Frank W. Chen has been licensed to practice law in California since 1988. The information presented here is general in nature and is not intended, nor should be construed, as legal advice. This posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, consult your own attorney.

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