automatic stay

An automatic stay is a statutory injunction that immediately halts most collection activities by creditors once a debtor files a bankruptcy petition. The stay is called “automatic” because it goes into effect without the need for a court order the moment the bankruptcy is filed. See: 11 U.S.C. § 362(a) of the United States Bankruptcy Code.

The stay temporarily bars actions such as lawsuits, wage garnishments, foreclosure proceedings, and other attempts to recover debts from the debtor or the debtor’s property. Its primary purpose is to preserve the debtor’s estate and provide breathing room to reorganize or liquidate assets under court supervision.

However, the automatic stay is not absolute. Under 11 U.S.C. § 362(d), a secured creditor may file a motion requesting relief from the stay. Relief may be granted if:

The creditor’s interest in the collateral is not adequately protected and the value is diminishing; or
The debtor has no equity in the property and it is not necessary for an effective reorganization.

There are also several statutory exceptions to the automatic stay, outlined in § 362(b). These include:

Actions to close out securities contracts;
Eviction proceedings where the lease was fully terminated before the bankruptcy filing;
Certain tax-related actions, such as audits, deficiency notices, and assessments;
Enforcement of a governmental unit’s police or regulatory powers.

A well-known case applying automatic stay principles is In re Enron Corp., 306 B.R. 465 (Bankr. S.D.N.Y. 2004), which addressed complex issues involving derivative contracts and creditor claims during bankruptcy proceedings.

[Last reviewed in June of 2025 by the Wex Definitions Team]

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