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What is the automatic stay in a Chapter 11 bankruptcy?

When an individual or a business decides to move forward with a bankruptcy to seek debt relief or to have a business reorganization, it can be an intimidating enough situation without having to decipher a variety of different terms. Frustration, confusion and fear are often part of any bankruptcy and it is important to understand the various aspects of the filing. For example, with a Chapter 11, some might not be aware of what an automatic stay is and what it entails. Since understanding these issues of nuance can be troublesome, this is when it is wise to have legal help to get through the Chapter 11 process.

An automatic stay is a certain amount of time in which the property repossessions, foreclosures, collections and judgments will be suspended. This means that the creditors will not be able to pursue the debtor with a debt or claim that came up prior to filing for bankruptcy. When the Chapter 11 is filed, there will be a stay issued and it will go into effect automatically. It must be remembered that there are certain types of actions under the law that are not subject to a stay.

What the stay will do is give the debtor a chance to get his or her bearings with what amounts to a break. There are times when the secured creditor will be able to get a court order to receive relief from an automatic stay. If, for example, the debtor has a property without equity and that property is not needed for the reorganization, the secured creditor can ask for the order to be lifted so foreclosure can take place, it can be sold and applied to the debt.

In addition, it is permitted to apply for fees that certain professionals made as the case goes along. Trustees, legal representatives or any other professional whom the court appointed can apply for interim compensation and reimbursement every 120 days. The debtor cannot pay obligations prior to the petition for bankruptcy. Ordinary costs that accompany the business continuing its operations can be paid.

Since Chapter 11 is often used for businesses, those who are using this option must be cognizant of all the different rules that apply to it including an automatic stay. Speaking to an attorney who is experienced in helping people suffering financial setbacks and with a Chapter 11 can be beneficial.

Source: uscourts.gov, “Chapter 11 -- Bankruptcy Basics -- The Automatic Stay,” accessed on May 17, 2016

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Kenneth C. Rannick, P.C.
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