Bankruptcy’s Automatic Stay of Proceedings


Category: Personal Bankruptcy (6) comments

stay of proceeding bankruptcyOne of the benefits of filing a consumer proposal or personal bankruptcy is something called a “Stay of Proceedings”.  This is a legal term, but what it means is that the people you owe are stopped (stayed) from continuing any legal actions against you.

How A Stay of Proceeding Works

A stay of proceedings is an automatic feature of filing a consumer proposal or bankruptcy.  You don’t have to ask for one – you get one as soon as you file.

As soon as you inform your trustee of a legal action (either pending, started, or completed) your trustee will put the Court, and the parties involved in the lawsuit, on notice that you have filed bankruptcy (or a proposal) and the stay is in place. This is one of the roles of your bankruptcy trustee — to deal with creditors and creditor actions for you.

This protection from your creditors remains in place during your bankruptcy unless the creditor applies to the Court to have it lifted.

Once you are are discharged from bankruptcy (or complete your proposal) the stay stops but at that time it doesn’t matter because the debt would have been included in your bankruptcy (we’ll note a few exceptions to this rule later) and has been eliminated by your discharge so there’s no longer any basis for a lawsuit.

What A Stay of Proceeding Will Stop

It doesn’t matter what stage the action against you is in. Filing bankruptcy provides protection from of all actions which means:

  • If someone is threatening legal action for money you owe them, a stay of proceedings eliminates the threat.
  • If they filed documents with a Court, the stay will stop the court action from proceeding.
  • If someone has already started a legal action again a stay stops the action dead in its tracks.
  • If someone has already sued you and been given a Judgment against you by the Court the stay of proceedings stops the enforcement of the Court Order.

One of the most common actions stopped as a result of the stay from filing bankruptcy is a wage garnishment.

As you can see, a stay of proceedings is a very powerful benefit when you file a consumer proposal or bankruptcy.

What a Stay Won’t Do

A stay does not work against Orders to pay child or spousal support. The only way to stop this kind of Court Ordered payment is to return to the Court that issued the Order and ask for it to be changed.

Creditors have the right to ask the Court to lift a stay of proceedings although they must follow specific steps.  In order to lift the stay someone has to bring a motion before the Bankruptcy Court. They must then argue that the Court action that was stopped needs to proceed in order to determine how much you actually owe the person, or that the type of debt you owe is not covered by filing a consumer proposal or bankruptcy.  Of course, you have the right to attend this hearing and argue against the request to lift the stay.

It is quite unusual for a creditor to bring a motion to lift the stay – we see fewer than 1 in 1,000 cases in our practice every year and sometimes all they are doing is establishing a value for a claim in bankruptcy anyway.

A bankruptcy stay also won’t deal with the types of debt not normally included under bankruptcy law. This includes things like fines and penalties, support payments, debts arising out of fraud or misrepresentation, restitution Orders, and most student loans if you have left school recently.  (See our article on student loan debt for more details).

If you have been threatened with or are already involved in a lawsuit then you should speak to your legal counsel and a trustee to determine if filing a consumer proposal or personal bankruptcy will be of any benefit to you.

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  1. John

    I signed a consumer proposal in Dec. 2014. I signed a contract with a company 2 weeks later. They are now suing me in small claims court – does the Stay of Proceedings apply to this action as it is a new lawsuit (and potentially new debt). The plaintiff’s lawyer has a copy of my consumer proposal but has not alerted the court.

    Reply
    1. J. Douglas Hoyes

      Hi John. A consumer proposal only covers debts that existed prior to the filing of the consumer proposal, so a debt incurred 2 weeks after filing a consumer proposal would not be covered by the stay of proceedings.

      Reply
  2. Bob V.

    Does a Bankruptcy stay of proceedings apply to actions initiated and ordered subsequent to the bankruptcy for claims arising post-bankruptcy?

    Reply

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