Automatic Stay for a Business: 7 Actions It Stops and 5 It Does Not

A bankruptcy petition halts more than most owners expect and less than most of them hope. The Code's section 362(a) names eight categories of conduct that stop at the moment of filing, without a hearing, without an order, and before the creditor on the other side has opened the envelope. The subsection that follows it, 362(b), runs past its twenty-sixth numbered paragraph of things the filing leaves alone.

The business that files in reliance on the first list tends to meet the second one later, at a worse hour.

1. A Lawsuit Over an Old Debt Freezes Where It Stands

The first clause of the automatic stay provision, 11 U.S.C. 362, reaches "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor" on a claim that arose before the case. The phrase about process matters more than it appears to. A funder that sued in state court last spring cannot serve the summons it had not yet served, cannot move for a default, and cannot notice the deposition it had calendared.

The words "or other" carry the clause beyond courtrooms. The forum need not be a court; the proceeding need only be against the debtor on something that could have begun before the petition.

A claim that arises after filing is untouched. Rent for the month after the petition is a new obligation, and the stay was never written to shelter it.

2. A Judgment Already Entered Becomes an Unenforceable Paper

Paragraph (a)(2) stops "the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case." The judgment is not vacated. It remains on the docket, it remains a liquidated claim, and it will be counted when claims are counted.

The judgment is valid. It cannot be collected.

Creditor's counsel knows both sentences before the debtor does.

3. Repossession Stops, Although Keeping What Was Already Taken Is Another Matter

Paragraph (a)(3) forbids "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." An equipment lessor may not send a truck for the ovens after the petition.

The harder question, whether a creditor that seized a vehicle before the filing must hand it back at once, reached the Supreme Court in City of Chicago v. Fulton, decided January 14, 2021. The Court held "only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3)," reading the paragraph to prohibit "affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed." The Court pointed instead to section 542, which it described as the provision "governing the turnover of estate property."

The stay freezes the picture as it stood when the petition was filed. It does not repaint the picture.

For a business whose delivery van was towed the week before filing, recovery runs through a turnover demand and, if refused, the bankruptcy court.

4. No Lien May Be Created, Perfected, or Enforced Against Estate Property

Paragraphs (a)(4) and (a)(5) stop "any act to create, perfect, or enforce any lien against property of the estate," and the same acts against the debtor's own property to the extent the lien secures a prepetition claim. A lender whose financing statement was never filed may not file it after the petition and improve its position at the expense of everyone else.

There is a narrow door in the other direction. Section 362(b)(3) permits acts to perfect an interest where the trustee's powers are themselves "subject to such perfection under section 546(b)" or where perfection falls within the grace period of section 547(e)(2)(A), so a creditor that was mid-perfection on the petition date is not always frozen out (the details belong to counsel, and they are details on which cases turn).

5. The Bank May Not Sweep the Account Against Its Own Loan

Paragraph (a)(7) stops "the setoff of any debt owing to the debtor that arose before the commencement of the case against any claim against the debtor." A bank that holds the company's operating account and also its term loan cannot debit the one to pay the other once the petition is filed.

The right does not disappear. Under section 506(a), a claim "subject to setoff" is treated as secured to the extent of the amount subject to setoff, so the bank keeps its value and loses only the self help.

6. Tax Court Cases Pause on the Bankruptcy Court's Timetable

Paragraph (a)(8) stays a proceeding before the United States Tax Court "concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine." For a corporation, the bankruptcy judge decides which periods the pause reaches. That is the whole of it.

7. Any Act to Collect a Prepetition Claim Is Forbidden, and the Daily Debit Sits Inside That Sentence

Paragraph (a)(6) is the broadest clause in the subsection and the one owners feel first: the stay reaches "any act to collect, assess, or recover" a claim that predates the petition. A demand letter mailed after the petition, a call about the company's balance, an ACH debit initiated on a prepetition contract: each is an act aimed at an old claim.

A merchant cash advance complicates the analysis without escaping it. A funder whose agreement describes a purchase of future receivables will argue that the daily remittance is the collection of its own property rather than recovery on a debt the company owes, and whether any such receipts are the funder's property, the estate's property, or the funder's cash collateral depends on the contract, the UCC filings, and the court. The argument is one the funder makes in the bankruptcy court, by motion, rather than one it may act upon from its own offices on the morning after the petition.

Servicing departments do not always see it that way. A debit that posts after filing should be recorded by date and amount and sent to counsel, because the remedy begins with a record of the act.

None of this protection exists before a petition is filed. Delancey Street works out settlements of funder and lender balances without a court. Because Delancey Street is not a law firm, it files no bankruptcy cases, and enrolling with it creates no stay of anything. A private pause on daily debits exists only if a funder agrees to it in writing, and its scope is whatever that writing says. The first conversation with the company is a free and confidential look at contracts and bank activity, with independently licensed counsel engaged when the questions turn legal. A business facing a levy this week, or a funder that will not negotiate at all, may need the statute more than the conversation, and bankruptcy counsel is the right first call in that case.

And 5 It Does Not

The owner's personal guaranty. The stay protects the debtor, and when the debtor is an LLC, the owner who signed the guaranty is someone else. The Second Circuit in Queenie, Ltd. v. Nygard International (2003) held that a suit against a codefendant is not stayed by the debtor's filing, and that the stay reaches a nondebtor only in narrow cases where the claim "will have an immediate adverse economic consequence for the debtor's estate." Extension takes a motion and an order. A funder may continue its suit against the guarantor on the day the company files.

Criminal proceedings. Section 362(b)(1) excludes "the commencement or continuation of a criminal action or proceeding against the debtor."

Regulators and tax auditors. Under 362(b)(4), a governmental unit may commence or continue an action "to enforce such governmental unit's ... police and regulatory power," including a judgment "other than a money judgment." Under 362(b)(9), "an audit by a governmental unit to determine tax liability," a deficiency notice, and an assessment all proceed. A health inspector may still close the kitchen.

A landlord whose lease has run out by its own terms. Section 362(b)(10) permits a lessor to recover nonresidential real property under a lease "that has terminated by the expiration of the stated term of the lease before the commencement of or during a case." A lease that expired on its stated date is over, and filing does not reopen it.

The repeat small business filer. Section 362(n) provides that the stay "does not apply" where the debtor is already a debtor in a pending small business case, or was one in a small business case dismissed by a final order, or in which a plan was confirmed, within the two years ending on the new order for relief. The exception to the exception requires the debtor to prove that the new filing "resulted from circumstances beyond the control of the debtor not foreseeable" earlier and that confirmation of a feasible, nonliquidating plan is more likely than not. A second petition filed within that window is, for stay purposes, a document with no force behind it until a court says otherwise, and the owners who most need the stay a second time are the ones the Code has decided to trust less.