When a bankruptcy case is filed, incredibly powerful shields are afforded the debtor which protect him or her from any collection effort or from the initiation of any collection effort. This means that not only may a lawsuit not be initiated against a debtor, but a garnishment or bank levy which stems from a judgment earned through a successful lawsuit is also precluded. So too is a foreclosure delayed or a vehicle repossession. The code itself is found in Title 11 of the United States Code in section 362. Specifically, albeit paraphrased below, the code provides:

11 USC §362(a): Except as otherwise provided, a [bankruptcy] petition [that is] filed operates as a stay, applicable to all entities, of

1. The commencement or continuation…of a judicial, administrative, or other [court] action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case;
2. The enforcement…of a judgment obtained before the commencement of the [bankruptcy] case;
3. Any act to obtain possession of property of the [bankruptcy] estate;
4. Any act to create, perfect, or enforce any lien against property of the [bankruptcy] estate;
5. Any act to create, perfect, or enforce…any lien [against the debtor]…that arose before the commencement of the [bankruptcy] case;
6. Any act to collect, assess, or recover a claim against the debtor;
7. The setoff of any debt owing to the debtor;
8. The commencement or continuation of a proceeding before the United States Tax Court.

Clearly, the intent of the legislature (and this has been echoed nearly unanimously by various courts who have heard cases related to the automatic stay) is to protect the debtor from the broad reach of a creditor in collection mode. The intent is also to protect creditors from other creditors. Consider that the bankruptcy trustee assigned to a Chapter 7 or Chapter 13 consumer bankruptcy is, essentially, empowered to undo any recent transaction of the debtor. This is called the Avoidance Power of the trustee. When invoked, assets of the debtor can be returned to the debtor’s bankruptcy estate and then dealt with as though they were part of the original filing. This, then, serves to assure one creditor is not given preferential treatment over another (along with other benefits and considerations, including lien avoidance, which is not dealt with herein, or to undo transfers to so-called insiders).

With respect to getting notice of the filing of the bankruptcy to the entities which are processing a collection, including their lawyers, the court sends out a mailing to anyone listed within the petition. This does not prevent the debtor, or the debtor’s bankruptcy lawyer, from proactively contacting the collectors to give notice of the filing of the case and to provide the case number. This flow of information is a permissive one-way street from debtor to collector (although collectors may contact debtors or their attorneys to discuss reaffirmation agreements or the debtor’s intention to surrender or keep secured property). This notice, when given, should have the immediate effect of discontinuing any garnishment, stopping a levy, preventing a foreclosure or vehicle repossession, or any other action which affects the debtor’s property. This is why it is sometimes incumbent on the bankruptcy attorney (or debtor in a pro se filing) to provide prompt notice to the collecting entity (including an HR department processing a garnishment, the Sheriff serving process, or a bank conducting a levy) to forestall these events, as opposed to waiting for “proper” notice to be given by the court.

In sum, the automatic stay is powerful tool to protect a debtor’s assets during the pendency of the bankruptcy. Because its powers are so broad, it does lend itself to abuse, by debtors seeking its enforcement without the actual intent to file bankruptcy. This has consequences, of course, including the ultimate denial of the application of the automatic stay protections (if multiple cases are filed by a debtor). When used as contemplated, however, the automatic stay provides not only asset protection in the short term but also a breathing period during which the debtor can be free of harassment and free to make informed decisions about how best to deal with their property.