Glossary
Automatic Stay
The automatic stay is a court order that takes effect immediately when a bankruptcy petition is filed, stopping most efforts by creditors to collect pre-bankruptcy debts from the debtor or its property.
Section 362 of the U.S. Bankruptcy Code creates the automatic stay. As soon as a business or individual files a bankruptcy petition, creditors generally must stop collection calls and letters, lawsuits, judgment enforcement, levies and garnishments, repossessions, and actions to create or enforce liens against the debtor's property, unless an exception applies. No separate court order is needed. The stay gives the debtor breathing room and keeps creditors from racing each other for the debtor's assets.
For a commercial creditor, the first step after learning of a bankruptcy is to stop collection activity against the debtor and notify any agency or attorney handling the account. Violating the stay can lead to sanctions, and actions taken in violation may be void. The stay generally protects only the debtor that filed. It usually does not stop a creditor from pursuing a non-debtor personal guarantor or co-obligor, although there are exceptions, including a separate co-debtor stay in some consumer chapter 13 cases, and a bankruptcy court can extend protection in some business cases. A creditor can ask the bankruptcy court for relief from the stay, for example to enforce rights against collateral that is not adequately protected.
Here is a fictional example. A food distributor, Valley Fresh Provisions, has a pending lawsuit against a restaurant group for $52,000. One week before trial, the restaurant group files chapter 11. Valley Fresh's attorney files a notice of bankruptcy in the state court case, and the lawsuit is paused. Valley Fresh then reviews whether it has a 503(b)(9) claim for recent deliveries, prepares a proof of claim, and evaluates its separate rights under the owner's personal guarantee.
The automatic stay matters to creditors because ignoring it can turn a legitimate claim into a liability. Understanding what the stay covers, and what it does not, lets a creditor shift quickly into the bankruptcy process and protect whatever recovery remains.
Example
Valley Fresh Provisions' $52,000 lawsuit is paused when the debtor files chapter 11. It shifts to filing a proof of claim and reviewing its guarantor rights.