Upon the filing of a chapter 7 or a chapter 11 petition, a bankruptcy case starts. With that start, a stop (or “stay”) is automatically imposed on creditor actions to collect debts from debtor or to control its property or operations – except within the bankruptcy case. The foreclosure action, the collection calls, the post-judgment collection efforts, the perfection of security interests, and the acts to replace management per loan documents or bond indentures – all must cease. If they do not, a debtor or trustee may seek relief (injunction, costs, damages, even punitive damages) from the court for willful violations of the automatic stay. The automatic stay gives breathing room to a DIP and surcease to a debtor, and thereby in many cases helps preserve the going-concern value of the debtor – which can enhance creditor recoveries. The automatic stay is said to outlaw the “race to the courthouse,” by which creditors thresh the debtor’s remaining assets in a legal tempest.
The automatic stay does not apply to actions against a debtor that arise after the petition date, or to acts enumerated in section 362(b) of the Bankruptcy Code, which include governmental enforcement of its police or regulatory powers (as distinct from governmental purchase and sales, for example), and certain efforts by parties to certain securities contracts to close out open positions or set-off amounts due.
A secured creditor may get at its collateral by successfully seeking in bankruptcy court to modify (or “lift”) the automatic stay under conditions set forth in the Bankruptcy Code, which relate to (among other things) deterioration in the value of collateral securing the creditor’s claim and to the necessity of the collateral to a reorganization of the debtor.