By Judge Clifton R. Jessup, Jr.
The automatic stay of Section 362(a) of the Bankruptcy Code gives a clear prohibition against collection activity after a bankruptcy case is filed. Because bankruptcy can intervene into many other areas of the law, every lawyer, even ones who never practice in the bankruptcy courts, should be aware of the general provisions outlined in this article so that they and their clients can avoid violating the automatic stay. Although this article contains a summary of key provisions of which every lawyer should be aware, it is not intended to provide an exhaustive treatment of the automatic stay, nor is it indicative of how the author may rule on any issue involving the automatic stay in a specific case.
The Automatic Stay Is a Federal Injunction Which Goes Into Effect Immediately Upon the Filing of Any Bankruptcy Petition
The bankruptcy injunction – called the automatic stay – has unique properties that differ from court-ordered injunctions. Court-ordered injunctions do not arise until a plaintiff files a motion and the issuing court determines that the relief sought is appropriate – they are not automatic. In contrast, because the automatic stay is a federal injunction imposed by congressional mandate, no judicial action is required for the stay to become effective. The automatic stay arises by operation of law the moment any bankruptcy petition is filed.
The Automatic Stay Generally Prohibits the Commencement or Continuation of Any and All Actions to Collect a Prepetition Debt
Pursuant to the Bankruptcy Code, the filing of a bankruptcy petition has certain immediate consequences, including the imposition of the automatic stay which stays the commencement or continuation of virtually all judicial proceedings. Generally, pending state court litigation must be put on hold the moment the debtor files a bankruptcy petition. Certain litigation is exempted from this rule, as this article will address later.
Filing a bankruptcy petition also initiates the stay of any act to recover prepetition debts owed by the debtor. Essentially all collection activities must be immediately suspended when a bankruptcy petition is filed. Accordingly, all creditor efforts to collect debts that were owed before the bankruptcy case was filed must stop. Fundamentally, the automatic stay is intended to maintain the status quo as it existed at the time the bankruptcy case was filed.
The Automatic Stay Benefits Not Only Debtors in Bankruptcy, But Also Creditors
In implementing the automatic stay, Congress sought to support the two core concepts in the Bankruptcy Code, which are: (i) to provide debtors with a fresh start, or the basic means of survival; and (ii) to ensure the equality of distribution among unsecured creditors. Congress was unequivocal in its stated intent that the stay must provide the debtor with breathing room from the financial distress that first drove the debtor to seek bankruptcy relief by immediately stopping “all collection efforts, all harassment, and all foreclosure actions.”
The commencement of a bankruptcy case also creates a bankruptcy estate, which is the basis for payment of creditors. The bankruptcy estate includes essentially all the non-exempt property owned by the debtor as of the petition date and all of the debtor’s rights to property. Without the stay, creditors would be able to pursue their own remedies against the bankruptcy estate, and those who acted first would obtain payment in preference to and, to the detriment of, other creditors. Thus, the stay both provides the debtor with an opportunity for a fresh start while facilitating the orderly distribution of assets to creditors by avoiding the race to the courthouse.
Any Action Taken in Violation of the Automatic Stay Is Void or Voidable
There is a split between the circuits concerning whether actions taken in violation of the stay are void or merely voidable. An action that is void is without effect, whereas an action that is voidable takes effect unless objected to. However, in the Eleventh Circuit, an action taken in violation of the automatic stay is void and without effect. Because the automatic stay arises the moment a case is filed, and is effective, regardless of notice, any act that violates the stay is “void ab initio.” Thus, collection activity taken after the stay arises has no legal effect.
There are Specific Exceptions From the Operation of the Automatic Stay, Including Domestic Support Obligations, the Exercise of Police and Regulatory Powers, and Negotiable Instruments
All proceedings against a debtor are immediately stayed upon the commencement of a case, unless the action falls under one of the enumerated exceptions listed in 11 U.S.C. § 362(b) of the Bankruptcy Code. For example, various family law proceedings are excepted, including the commencement or continuation of an action: (i) to establish paternity; (ii) to establish or modify an order for domestic support; (iii) to establish child custody or visitation; (iv) to dissolve a marriage, except to the extent that the proceeding seeks to determine the division of estate property; and (v) to address domestic violence actions.
Actions taken by a governmental unit or agency to enforce its police or regulatory powers are also excepted from the stay. For this exception to apply, the action taken by the governmental unit must generally effectuate some underlying public policy or protect public health and safety.
The commencement or continuation of criminal proceedings against a debtor are also excepted from the stay. It is important to distinguish between civil and criminal contempt actions, because a contempt action that is civil in nature is subject to the automatic stay. For example, the Eleventh Circuit affirmed an order finding that a debtor’s former spouse willfully violated the stay by opposing his release from prison until he agreed to pay unpaid child support as a condition of release. The contempt order at issue was found to be civil in nature, and not criminal.
Presenting a negotiable instrument, giving of notice, and protesting dishonor of such an instrument is also excepted from the stay. Under this exception, courts have held that a payday loan lender may present a check for payment after the debtor files for bankruptcy without violating the stay.
The Automatic Stay Can Be Lifted or Terminated by the Court for Cause
Because the distinction between what the stay covers and what is excepted under the Code is sometimes unclear, when in doubt a creditor should seek relief from the stay by filing a motion to lift the stay with the bankruptcy court. Under 11 U.S.C. § 362(d)(1), relief from the stay may be granted for cause. The term cause is not defined under the Bankruptcy Code and its application is determined by the bankruptcy court.
A secured creditor seeking stay relief to repossess collateral or to foreclose on real property generally must show that the debtor does not have any equity in the property, and that the property is not necessary for the debtor’s effective reorganization. Cause may also exist if the debtor fails to maintain insurance for a lender’s collateral or otherwise does not provide adequate protection to a secured creditor.
If the court determines that good cause exists to lift the stay, the prepetition state law rights of the parties are restored. The creditor is then entitled to enforce its rights outside of the bankruptcy court to the extent permitted by the order lifting the stay. For example, if the court determines that cause exists to lift the stay to allow a creditor to pursue the debtor’s insurance policy, the order lifting the stay will generally limit any recovery to available insurance proceeds.
A Willful Violation of the Automatic Stay Involving an Individual Can Result in Compensatory Damages, Including Attorney Fees, and in Extreme Cases, Punitive Damages
A willful violation of the automatic stay can result in penalties on the violating party. The Eleventh Circuit has stated that the test for determining whether a willful violation of the stay exists is if the creditor “(1) knew the automatic stay was invoked and (2) intended the actions which violated the stay.” Specific intent to violate the stay is not required. If a creditor knows that a debtor has filed a bankruptcy petition or has reason to know and, thereafter, takes an action that violates the stay, the action is willful under the Bankruptcy Code even if the creditor did not specifically act with the intention of violating the automatic stay. Formal notice from the bankruptcy court is not required. For instance, if the creditor calls the debtor and is informed that the debtor has filed bankruptcy, any further collection activity violates the stay.
If an individual is injured by a willful violation of the stay, an award of actual damages is mandatory, and punitive damages are possible in extreme cases. Actual damages are compensatory in nature. For example, if a creditor violates the stay by repossessing the debtor’s vehicle, the debtor will be entitled to compensation for any financial harm incurred due to the loss of transportation such as lost wages and costs incurred to obtain alternate transportation. In addition, under the Bankruptcy Code, actual damages include attorneys’ fees and costs incurred in remedying the stay violation. Because attorneys’ fees constitute actual damages for purposes of a willful violation of the stay, reasonable attorneys’ fees and costs may be assessed.
The Automatic Stay Can Have Limited Duration in Certain Repeat Bankruptcy Cases
To prevent an abuse of the bankruptcy system by serial filers, the Bankruptcy Code limits the duration of the automatic stay if the debtor had one or more cases pending during the one-year period preceding the petition date. If the debtor had one case pending during the prior year, the stay terminates thirty days after the debtor commences the new case. The bankruptcy court may, however, extend the stay if the debtor demonstrates that the new case was filed in good faith. A case is presumptively filed in bad faith if there has not been a substantial change in the debtor’s financial or personal affairs since the dismissal of the prior case. In a chapter 13 case, this means that the debtor must demonstrate that it has the ability to make payments under a confirmable plan because the debtor now has stable income resulting from some specific change in the debtor’s financial or personal circumstances. A hearing to extend the stay must be completed within the 30-day period after the petition is filed.
In one of the only instances under the Bankruptcy Code, the stay does not go into effect if the debtor filed two or more petitions within the prior year. However, the bankruptcy court can still impose the automatic stay if the debtor files a motion within 30 days after the petition date and is able to rebut the presumption that the new case was filed in bad faith.
The Automatic Stay Terminates Automatically Upon the Closing or Dismissal of the Bankruptcy Case
Unless otherwise terminated by order of the bankruptcy court, the automatic stay remains in effect until the earliest of: (i) the time the bankruptcy case is closed; (ii) the time the bankruptcy case is dismissed; or (iii) the time the discharge is granted or denied. The automatic stay which arises by operation of law, also can expire by operation of law when the bankruptcy case is closed or dismissed, or the debtor receives a discharge.
The Automatic Stay, When Specifically Enforced, Can Only Be Ignored at Your Peril
The United States Supreme Court has stated that when a “statute’s language is plain, ‘the sole function of the courts’ . . . ‘is to enforce it according to its terms.’” Because the stay is one of the fundamental protections provided by the Bankruptcy Code, bankruptcy courts “will not hesitate to defend the integrity of the bankruptcy laws and the bankruptcy court, as well as the protections afforded to debtors who seek shelter under them,” by enforcing the plain language of the statute.
For example, the Eleventh Circuit affirmed an award of punitive damages in a case where a debtor informed a local creditor’s manager that he had filed bankruptcy nine days after the creditor filed a small claims action and the creditor failed to dismiss the action until the debtor filed a bankruptcy complaint seeking damages. By using non-attorney staff to prosecute a small claims action for the admitted purpose of reducing legal fees and costs, the Eleventh Circuit found that the creditor acted with reckless disregard of the automatic stay.
Dunning collection efforts are also not permitted. For example, in another state a creditor owed less than $1,000 was found to have violated the stay and was ordered to pay compensatory damages for emotional distress, $16,000 for attorneys’ fees, and $3,000 in punitive damages for placing a sign in front of his business dunning the debtor in a small town where everyone knew the debtor. In another case, the bankruptcy court awarded $50,000 in punitive damages, explaining that such amount was necessary to deter a debt collector from debiting a debtor’s bank account and repeatedly calling the debtor, knowing she was in bankruptcy. Finally, a bankruptcy court in another state recently awarded punitive damages of $500,000 as necessary to deter a mortgage servicer from committing further stay violations after evidence revealed the existence of unwritten and undisclosed policies, and express procedures adopted to narrow the sources of bankruptcy information that the servicer was willing to acknowledge, and resulted in the servicer’s disregard for the debtor’s bankruptcy status and the automatic stay.
If there is any question regarding whether the automatic stay applies in a particular situation, a bankruptcy practitioner should be consulted immediately before taking any action to collect a debt owed by a debtor prior to the commencement of a case.
. Jove Eng’g, Inc. v. I.R.S. (In re Jove Eng’g), 92 F.3d 1539, 1546 (11th Cir. 1996).
 Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), 39 F.4th 62, 71 (2d Cir. 2022).
 Auriga Polymers Inc. v. PMCM2, LLC, 40 F.4th 1273, at *2 (11th Cir. 2022).
 H.R. Rep. No.95-595, at 6297 (1977).
 Auriga Polymers, 40 F.4th, at *2.
 H.R. Rep. No.95-595, at 6297.
 See Easley v. Pettibone Michigan Corp., 990 F.2d 905, 911 (6th Cir. 1993) (joining the Fifth Circuit and adopting minority view that actions taken in violation of the stay are voidable).
 3 Collier on Bankruptcy ¶ 362.12 (Richard Levin & Henry J. Sommer eds., 16th ed. 2022).
 U.S. v. White (In re White), 466 F.3d 1241, 1244 (11th Cir. 2006) (citing Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982)).
 Alley Cassetty Cos., Inc. v. Wren (In re Wren), 502 B.R. 609, 612-13 (N.D. Ga. 2013) (quoting In re Peralta, 317 B.R. 381, 389 (9th Cir. BAP 2004)).
 11 U.S.C. § 362(b)(2)(A)-(B).
 Russell v. Caffey (In re Caffey), 384 Fed. Appx. 882 (11th Cir. 2010).
 11 U.S.C. § 362(b)(11).
 Blasco v. Money Servs. (In re Blasco), 352 B.R. 888 (Bankr. N.D. Ala. 2006).
 Jove Eng’g, Inc. v. I.R.S. (In re Jove Eng’g), 92 F.3d 1539, 1555 (11th Cir. 1996).
 In re White, 410 B.R. 322, 326 (Bankr. M.D. Fla. 2009).
 11 U.S.C. § 362(k).
 Id. at § 362(c)(3)(B).
 Id. at § 362(c)(3)(C)(i)(III).
 Id. at § 362(c)(2)(A)-(C).
 Smith v. HSBC Bank USA, N.A., 775 Fed. Appx. 492 (11th Cir. 2019).
 Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6(2000) (quoting U.S. v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)).
 In re White, 410 B.R. at 328.
 Parker v. Credit Cent. South, Inc. (In re Parker), 634 Fed. Appx. 770 (11th Cir. 2015).
 Collier v. Hill (In re Collier), 410 B.R. 464 (Bankr. E.D. Tex. 2009).
 Campbell v. Carruthers (In re Campbell), 553 B.R. 448 (Bankr. M.D. Ala. 2016).
 In re Moon, No. 13-12466, 2022 WL 2951490 (Bankr. D. Nev. June 13, 2022).