Bankruptcy and the Automatic Stay

Shalem Shem-Tov

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Chapter 11 Bankruptcy Attorney

Contributor Level 11

Posted almost 2 years ago. 0 helpful votes

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When a debtor files any type of bankruptcy, a “automatic stay" is created which prevents all creditors from pursuing the debtor. That is, creditors cannot call or otherwise contact the debtor to ask for payment, they cannot sue the debtor (and any pending lawsuits are immediately halted), they cannot collect on a judgment and they cannot foreclose on any property of the debtor. As the description implies, this “stay" of the creditors is automatic. The filing of the bankruptcy case alone, and nothing else, creates the stay. So, even if a creditor does not know of the bankruptcy filing, any action the creditor takes against a debtor can be cancelled.

For example, let us assume that there is a lawsuit pending against a debtor who has not yet filed for bankruptcy. The debtor decides not to file an Answer in the lawsuit and therefore the creditor requests that a default be entered against the debtor. Before the default is entered, however, the debtor files for bankruptcy. The next day, before the debtor has a chance to inform either the creditor or the court in which the lawsuit is pending of the bankruptcy filing, the court enters the default against the debtor. Sometime later, for whatever reason, the bankruptcy gets dismissed and the debtor now wants to file an Answer in the lawsuit. Normally, once a default is entered, the debtor (or defendant) can no longer file an Answer. However, in this case, since the bankruptcy was filed prior to the default being entered, the automatic stay prevented the default from being effective. Although neither the court nor the creditor knew of the bankruptcy, the default must be set aside.

Some time ago, our office represented a client in this exact situation. We filed a motion to set aside the default entered against our client after the client had filed for bankruptcy. Although the creditor opposed our motion, the Judge recognized that due to the automatic stay being in effect on the date the default was entered, the default was ineffective. We won the motion, and our client was able to file his Answer and defend the lawsuit.

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