What the Automatic Stay Does and Doesn’t Cover in Chapter 11

The Chapter 11 automatic stay is an injunction that takes effect the instant a bankruptcy petition is filed and halts almost every attempt to collect a pre-filing debt from the debtor or the debtor’s property. No judge has to sign anything. It binds every kind of creditor, from a small vendor to the IRS, and it applies whether or not the creditor has heard about the case yet.¹ The stay is what gives a debtor room to reorganize instead of watching the fastest creditors carve up the company.

What the Stay Stops

Section 362(a) reaches nearly any action aimed at collecting a debt that existed before the filing. Specifically, from the moment the petition is docketed, creditors cannot:

File or continue a lawsuit or administrative proceeding against the debtor on a pre-filing claim.
Enforce a judgment — no wage garnishments, no bank levies, no execution on assets.
Foreclose on real estate or repossess collateral.
Create, perfect, or enforce a lien against property of the estate.
Set off a pre-filing debt against money they owe the debtor. A bank holding the debtor’s deposit account cannot simply grab the balance to satisfy a loan; it has to ask the court.
Send demand letters, place collection calls, or otherwise pressure the debtor to pay.¹

Utilities get their own rule. A gas, water, electric, or telephone provider cannot shut off service because of the filing or an unpaid pre-filing bill, but the debtor has 30 days to give adequate assurance of payment for post-filing service, usually a deposit. Miss that deadline and the utility can cut service off.²

A creditor who acts without knowing about the filing still violates the stay. Lack of notice is not a defense to whether the stay applied, though it can affect what the court does about it.¹

Pre-Filing Debts Only

The stay protects the debtor from claims that arose before the petition date. Bills that come due after the filing — new vendor invoices, post-petition rent, new contracts the debtor signs while operating in Chapter 11 — are not covered. A supplier delivering goods to a debtor-in-possession can chase payment for that new invoice through normal channels, although those post-filing claims typically get administrative expense priority in the case.¹

What the Stay Does Not Stop

Congress carved out categories where public policy overrides the general freeze. Courts read the exceptions narrowly, so a creditor claiming one needs to fit squarely inside the statute.

Criminal Cases and Family Support

A bankruptcy filing does not pause a criminal prosecution, and it does not block enforcement of criminal fines or restitution. It also does not touch actions to establish paternity or to establish, modify, or collect domestic support obligations such as alimony and child support.¹

Government Police and Regulatory Power

Federal and state agencies keep their police and regulatory authority. Environmental cleanup orders, safety inspections, and licensing enforcement generally continue. The line is between an agency protecting public health or safety and one collecting money. An order requiring the debtor to clean up a contaminated site typically proceeds; a suit seeking a cash judgment for the same contamination typically does not. Courts look for whether the relief is prospective compliance or a repackaged demand for payment.

Tax Audits

The IRS and state tax authorities cannot collect pre-filing taxes during the case, but they can audit the debtor and issue notices of deficiency. Assessment continues; collection stops.¹

Expired Nonresidential Leases

If a commercial real property lease expired by its own terms before the filing or during the case, the landlord can move to recover possession without asking the bankruptcy court. The stay never attaches. This exception is narrow: it covers leases that ran out on their own, not leases the landlord terminated for default before filing, where the debtor may still argue the stay applies.¹

Certain Financial Contracts

Netting and setoff rights under swap agreements, securities contracts, and repurchase agreements are largely exempt. The exceptions exist to keep one bankruptcy from cascading through financial markets.

Contract Termination Clauses Are Blocked

Many commercial contracts say the other side can walk away the moment the counterparty files for bankruptcy. These “ipso facto” clauses are largely unenforceable under the Code. A contract cannot be terminated or modified solely because the debtor filed, became insolvent, or had a trustee appointed.³

This is central to reorganization. A Chapter 11 debtor often depends on keeping supply agreements, distribution contracts, and leases in place, and the debtor gets to decide whether to assume or reject each executory contract. The counterparty does not.

Intellectual property licenses are the notable soft spot. Trademark licensors in particular have strong arguments, in jurisdictions applying the so-called hypothetical test, that their licenses cannot be assumed without consent because the licensor’s quality control is integral to the mark. A licensor in that situation may be able to get stay relief and pursue termination.

Guarantors and Co-Obligors Are Not Protected

The unpleasant surprise for many business owners: the Chapter 11 stay protects the debtor, not the people who signed personal guarantees. If your company files and you personally guaranteed the loan, the lender can still sue you for the full amount. The statute limits the stay to actions “against the debtor.”¹

Bankruptcy courts sometimes stretch stay-like protection to non-debtor guarantors under their general power to issue orders “necessary or appropriate” to enforce the Code.⁴ To get that kind of injunction, the debtor typically has to show the guarantor’s exposure is so intertwined with the debtor’s that a judgment against one is effectively a judgment against the other, or that the injunction is necessary for a viable reorganization. Courts apply the ordinary preliminary injunction factors, and these orders are discretionary. They are not the default.

How Creditors Get the Stay Lifted

A creditor who wants to foreclose, continue a lawsuit, or take any other blocked action has to file a motion for relief from the stay. The court will not act on its own.

The Statutory Clock

Once a motion is filed, the stay terminates automatically 30 days later unless the court orders it continued. The court can hold a preliminary hearing inside that window, and if it finds a reasonable likelihood the party opposing relief will prevail, it can keep the stay in place pending a final hearing. That final hearing has to conclude within 30 days after the preliminary hearing, absent party agreement or a finding of compelling circumstances.¹

Grounds

Two main tests drive the decision.

The first is cause, most often lack of adequate protection. A secured creditor whose collateral is losing value during the case can argue its position is eroding. The debtor can respond with periodic cash payments to cover depreciation, a replacement lien on other property, or proof of a large enough equity cushion to absorb the decline. If the debtor cannot protect the creditor’s interest, the stay comes off.¹

The second requires two findings together: the debtor has no equity in the property, and the property is not necessary for an effective reorganization. An underwater investment lot the debtor does not use is a classic candidate for relief. Corporate headquarters, even if technically underwater, is much harder to pry loose because the debtor needs it to operate. Courts can also condition continued protection on milestones, so that the stay lifts automatically if the debtor misses a plan-filing deadline or a payment target.¹

Single Asset Real Estate

A debtor whose business is essentially one property or project generating substantially all of its income faces a tighter deadline. The secured lender can get stay relief unless the debtor, within 90 days of the order for relief (or 30 days after the case is determined to qualify, whichever is later), either files a plan with a reasonable chance of confirmation or starts making monthly interest payments to the secured creditor at the contract rate.¹

What Happens When a Creditor Violates the Stay

Actions taken in violation of the stay are generally treated as void, legally erased as if they never happened. A creditor that forecloses or garnishes anyway usually has to unwind the whole thing. A minority of federal circuits treat violations as voidable instead, giving the court discretion to leave the action in place, but the majority rule remains void.

The debtor can also seek damages. A “willful” violation does not require an intent to harm; it only requires that the creditor knew about the bankruptcy and intentionally took the action. Once notice arrives, the creditor is charged with knowing the stay exists. Available damages include actual losses — the cost of recovering seized property, lost revenue from a wrongful shutoff, attorneys’ fees — and, for individual debtors in appropriate cases, punitive damages.¹

Corporate debtors hit a limit here. The statutory remedy under Section 362(k) is available to “an individual” injured by the violation, and courts have generally read that to exclude corporations from punitive damages under this subsection. Corporate debtors can still pursue actual damages and fees through the court’s equitable powers or contempt proceedings.¹

How Long the Stay Lasts

The stay is not permanent. It ends automatically when:

The case is dismissed or closed.
The court grants relief from the stay as to a specific creditor or piece of property.
Property leaves the estate through sale, abandonment by the trustee, or transfer under a confirmed plan.
A plan of reorganization is confirmed. The stay against the debtor and estate property generally falls away, and the discharge injunction under Section 524 takes over, permanently barring collection of discharged debts.⁵

Repeat Filers Get Less, or Nothing

The Code punishes serial filings. If an individual debtor had a prior case dismissed within the last year, the stay in the new case expires after 30 days unless the debtor moves to extend it and proves good faith. The filing is presumed not in good faith if the prior case was dismissed for failing to comply with court orders, failing to provide adequate protection, or failing to perform under a confirmed plan, and only clear and convincing evidence overcomes that presumption.¹

With two or more dismissed cases in the prior year, no stay takes effect at all. The debtor has to ask the court to impose one, again by clear and convincing evidence, and until the court acts, creditors can continue collecting as if no bankruptcy had been filed.¹ These rules apply to individual debtors, but they reflect the broader point that the stay is a powerful protection with limits built in for abuse.

1
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
2
Office of the Law Revision Counsel. 11 USC 366 – Utility Service
3
Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases
4
Office of the Law Revision Counsel. 11 USC 105 – Power of Court
5
Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge