Bankruptcy’s Automatic Stay of Proceedings


Category: Personal Bankruptcy (18) 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
  3. Michelle

    Hi there,

    I filed a consumer proposal in July and added debts to this proposal as i went. I have fitness account that i added on as it was going to go to collections. This collections company refuses to comply with the proposal stating that they do not have to agree to this. My proposal was approved and they still refuse to accept it once by law you are suppose too. They continued to harass me for payment. My trustee has tried numerous times to contact them and left messages that they refuse to return. My trustee has not gotten a claim number from them you to pay them as thy refuse to accept the proposal. They have not reported on my credit history as bad debt collections unpaid. Are they legally entitiled to do this? who can i speak to instead of my trustee?

    Reply
    1. Ted Michalos Post author

      The Office of the Superintendent of Bankruptcy should be notified – they used to have a Creditor Compliance Unit to deal with these sorts of complaints. Failing that, all you can do is send the fitness account and collection agent a registered letter advising them to “cease and desist” with collections activities. If they think you owe the debt then they should proceed to Court to deal with it. If they contact you after you send this letter then you should notify the Ministry of Consumer Affairs as the collection agent is violating the rules and regulations they are required to follow under the law…

      Reply
  4. Ash

    Hello! Thanks so much for this site.

    I lost a case and a judgment order was set against me for $5 000 at Small Claims Court.

    Since I am barely scrapping by supporting my kids and I, my mother suggested I filed a consumer proposal.

    One question though: Once my consumer proposal is discharged (it would include the $5K debt) can the creditor come after me again and try to garnish my wages and take away my assets all over again? Will my consumer proposal not protect me after it is discharged? It’s a huge risk and want to ensure it is worth it.

    Thank you for the advise and website.

    Reply
    1. J. Douglas Hoyes

      Hi Ash. Once your consumer proposal is completed, all of your debts are discharged, meaning that the debts no longer exist, so they can’t come back to you later; that’s the point of a consumer proposal; it’s legal protection, which is why a consumer proposal is a very effective solution to eliminate a judgement.

      Reply
  5. R s

    Hi I was director of a corporation which had a big secured line of credit. The bank recalled the loan and as I couldnt pay trustees took over the Corp. Later the trustees brought along a motion to declare me as director a bankrupt. It’s been over 3 years since then. I did file my reports etc for a couple of years but the trustees kept opposing my discharge. I got demotivated and stopped filling my reports for over a year now. I need to file a motion to get a discharge. One of the creditors also took an ex party judgement against me. Pls advice what can be done

    Reply
    1. Ted Michalos Post author

      Your “best bet” will be to re-engage with the trustee, if for no other reason to determine exactly what the trustee requires you to do in order for them to stop opposing your discharge. If you are hesitant to speak with the trustee you may use a lawyer as an intermediary, but of course there will be a cost associated with doing so.

      If you do not re-engage with the trustee and simply schedule a discharge hearing yourself you may find out in Court that the trustee is still opposing your discharge making the exercise moot…

      Reply
  6. Kim Carpentier

    When I filed for bankruptcy, i had rental arrears of $1000 already. I asked my trustee if this arrear should be included in my debts and she said no. However, I have not been able to pay more than the monthly rent since (still owing $1000) and my landlord just filed a motion to have me evicted and to repay the sum. Would the stay of proceedings apply because the amount was owed before I declared bankruptcy, or will it consider the date the motion was requested?

    Reply
    1. Ted Michalos Post author

      If I was your landlord, I would apply all your rent payments to the oldest unpaid rent first. In other words, the landlord is arguing that you are behind with this month’s rent, not the rent before you filed your bankruptcy. By accounting for your payments in this manner it means the rent debt has nothing to do with your bankruptcy so the Stay would not apply.

      That doesn’t help you. You want the rent arrears listed and included in your bankruptcy – then it is a debt like any of your other debts and the landlord can’t evict you for not paying it. I think you need to go and speak with your trustee about how to handle this.

      Reply
  7. Tracey

    My ex filed bankruptcy to avoid paying me the court ordered settlement amount. It is not support or alimony. The court awarded me costs for several reasons…I can’t get a straight answer as to whether I am still entitled to collect the court appointed fines, or if they are cleared during the bankruptcy as well.
    Thank you

    Reply
    1. J. Douglas Hoyes

      Hi Tracey. The answer depends on the wording of the court order. If the order classifies the court costs “in the nature of support” then they survive bankruptcy. If not, then they would be discharged in a bankruptcy. I would suggest discussing this with your lawyer, who would be best positioned to review the order. You could also ask your ex-husband’s trustee, although this is somewhat outside of their scope.

      Reply
  8. Tansi

    My former landlord has just served me and my husband and is suing us for back rent and damages. The amounts he is asking for is not true and also we deny other costs he says we owe. Though we do owe him some and never denied it and told him we would pay him back once hours at work would pick up. We just moved 1.5 months ago and he is already serving us and not giving us a chance to get back on our feet.However, we are barely getting by and feel he would not accept a payment plan that would work with our budget. If we filed for bankrupcy AFTER being served papers that he is suing…would the amount he is asking for be included in the bankrupcy?

    Reply
    1. J. Douglas Hoyes

      Hi Tansi. Yes, rent arrears for a place you have moved out of would be discharged in a bankruptcy. You should consult with a licensed insolvency trustee to determine if this is the best course of action.

      Reply

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