Relief from the automatic stay: Overview, definition, and example
What is relief from the automatic stay?
Relief from the automatic stay refers to a legal action that allows a creditor or other party to continue pursuing debt collection or other legal actions despite a bankruptcy filing. When a person or business files for bankruptcy, an automatic stay goes into effect, which temporarily halts most collections efforts, including lawsuits, foreclosures, and garnishments. However, relief from the automatic stay can be granted by the bankruptcy court, allowing the creditor to resume their actions under certain circumstances.
For example, if a company files for bankruptcy, the automatic stay would prevent creditors from attempting to collect debts. If a creditor feels they are being unfairly impacted, they can ask the court for relief to continue their collection efforts.
Why is relief from the automatic stay important?
Relief from the automatic stay is important because it provides creditors and other parties the opportunity to protect their interests when a bankruptcy filing may affect them. While the automatic stay provides necessary protection for the debtor, relief from the stay allows creditors to pursue actions like foreclosure, eviction, or debt collection if they can show that they are being harmed or that the debtor’s bankruptcy case does not affect their rights.
For businesses, relief from the automatic stay can be crucial for recovering assets or continuing to enforce rights that may otherwise be put on hold due to a bankruptcy filing.
Understanding relief from the automatic stay through an example
Imagine a business that owes money to a supplier. The business files for bankruptcy, triggering an automatic stay that halts the supplier’s ability to collect the debt. However, if the supplier can demonstrate to the court that the business's bankruptcy case is not going to impact their ability to collect or that continuing the collection process is necessary to protect their interests, they might be granted relief from the automatic stay. This would allow them to resume their collection efforts.
In another scenario, a landlord may be unable to evict a tenant who has filed for bankruptcy due to the automatic stay. If the landlord can show that the tenant is not paying rent and is causing harm to the property, they might be granted relief from the automatic stay, allowing them to move forward with the eviction.
An example of a relief from the automatic stay clause
Here’s how a relief from the automatic stay clause might be reflected in a contract or legal document:
“Upon the filing of bankruptcy, the creditor may file a motion for relief from the automatic stay to resume efforts to collect any outstanding debts, enforce a lien, or pursue other legal actions to protect their interests.”
Conclusion
Relief from the automatic stay is a legal remedy that allows creditors to resume actions they would normally be prohibited from pursuing during a bankruptcy case. While the automatic stay provides protection for the debtor, relief from the stay ensures that creditors have an avenue to protect their rights and recover assets when necessary. It’s an essential legal tool for businesses involved in bankruptcy proceedings, balancing the interests of both debtors and creditors.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.