January 24th, 2025
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One of the significant benefits of Chapter 11 bankruptcy is the automatic stay on debt collection. The automatic stay prohibits activity by creditors and claimants to pursue litigation, judgments, collection activities, foreclosures, and repossessions for debts and claims that arose before the filing of the Chapter 11 petition. The automatic stay includes the most common types of claims and debts, but it does have limitations. If you are a business or individual considering Chapter 11 bankruptcy, it is crucial to understand how the automatic stay will affect your case by talking to a Chapter 11 bankruptcy attorney.

Bankruptcy Code Automatic Stay Provisions

For Chapter 11 bankruptcy, as with other types of bankruptcy, the Bankruptcy Code provides for a stay of creditor and claimant actions against the debtor that goes into effect automatically when the Chapter 11 petition is filed. The stay provides a wall of protection around the business or individual, enabling them to stabilize and reorganize their finances without the constant threat of immediate creditor harassment and collection actions.

The automatic stay provisions in 11 U.S.C. § 362 are extensive and complex. Subsection 362(a) lists eight categories of proceedings that are covered by the stay. They include:

  • Commencement or continuation of judicial, administrative, or other action or proceeding against the debtor to recover on a claim that arose before the bankruptcy petition was filed
  • Enforcement of a judgment against the debtor or the bankruptcy estate
  • Acts to obtain possession of property of or from the bankruptcy estate or to exercise control over property of the estate
  • Acts to create, perfect, or enforce a lien
  • Acts to collect, assess, or recover a claim

Several other types of actions are also listed in the subsection as being covered by the automatic stay.

Section 362(b) sets forth an extensive list of types of actions that are not covered by the automatic stay. They include:

  • Criminal proceedings
  • Certain domestic-related matters, including paternity, establishment or modification of domestic support, custody, visitation, dissolution of a marriage (except to the extent the proceeding determines division of property in the bankruptcy estate), and domestic violence
  • Collection of support from property that is not part of the bankruptcy estate
  • Proceedings relating to withholding, suspending, or restricting a driver’s license, professional or occupational license, or recreational license, under state law

The subsection lists additional detailed, specific actions exempted from the automatic stay, including certain tax-related and other specific financial transactions.

The complicated nature of the provisions relating to exemptions from the automatic stay makes it important for a business or individual to consult with a knowledgeable Chapter 11 bankruptcy lawyer to determine the effect of the automatic stay on a specific case before filing a petition.

Creditor Motions to Lift the Automatic Stay

Once the automatic stay goes into effect, it generally lasts until the bankruptcy court confirms the reorganization plan, dismisses the case, or converts it to a different type of bankruptcy. The stay continues to protect the business or individual from creditor actions while they negotiate with the creditors and develop a viable reorganization plan.

In some circumstances, a creditor can file a motion with the bankruptcy court to request relief from the automatic stay. For example, a secured creditor may ask the court to lift the stay if the debtor has no equity in the property securing the debt, and the property is not necessary for a reorganization. If the court lifts the stay, the secured creditor can, for example, foreclose on the property and sell it, applying the proceeds to the debt.

The bankruptcy court grants a request to lift the stay only if the creditor demonstrates good cause. The creditor has the burden of proof, and the debtor is entitled to a full evidentiary hearing on the motion. Representation by an experienced Chapter 11 lawyer is critical in defending against a motion to lift the stay.

If a creditor files a motion to lift the stay, the court’s action on the motion affects only the creditor who initiated the request. If the motion is granted, it does not lift the stay as to other creditors and claimants covered by the automatic stay. Any creditor who violates the stay under any circumstances may be sanctioned by the court and ordered to pay damages and attorney’s fees.

Connect With an Experienced Florida Chapter 11 Lawyer

Wernick Law welcomes Florida businesses, small businesses, and individuals wishing to learn more about Chapter 11 bankruptcy to schedule a consultation by calling 561-961-0922 or using the online contact form.

Based in Boca Raton, Wernick Law serves clients in South Florida (including West Palm Beach, Broward County, and Miami), Southwestern Florida (including Naples and Fort Myers), Tampa, Orlando, Jacksonville, and elsewhere in the state.