Using bankruptcy to help restructure a business can provide an opportunity to make it through financially tough times and start fresh. Business owners who are considering this option likely have a lot of questions. One common set of questions revolves around the automatic stay. This piece will briefly discuss the automatic stay as well as how it helps give struggling companies obtain a breathing spell from ongoing litigation,.
What is the Automatic Stay?
The automatic stay is set forth in section 362 of the Bankruptcy Code. The automatic stay prevents creditors from continuing actions against a debtor to collect upon a debt or seize property. Once a company files for bankruptcy relief, the automatic stay goes into effect immediately and applies regardless of which chapter of bankruptcy the debtor files under. The automatic stay serves to provide a breathing spell from actions brought by a debtor’s creditors by freezing garnishments, litigation and any other actions against the debtor to collect upon a debt.
What is the importance of the Automatic Stay?
The automatic stay is important because it serves to benefit both the debtor and all parties-in-interest. Because all efforts to collect a debt are put on hold, creditors cannot race to the courthouse in an attempt to get their share of the business assets ahead of other creditors. This breathing spell gives the debtor time to get its affairs in order and come up with a plan or sale of assets without continual pressure from creditors.
What happens if a creditor violates the Automatic Stay?
A creditor who fails to honor the automatic stay can face serious consequences, including, sanctions and fines. It is important to note that there are situations when a creditor can seek relief form the automatic stay for various reasons. Many times litigation creditors that have recourse to insurance proceeds seek stay relief to pursue their claims and agree to limit their recovery to insurance proceeds for example. However, absent unusual circumstances, it is unlikely that a bankruptcy judge will grant stay relief in the beginning of a case so that a debtor has some breathing room to propose a plan or sell their assets in an organized and value maximizing process, without the distraction and cost of ongoing litigation.