As soon as an entity has filed a bankruptcy petition, the consumer and the consumer’s attorney are subject to the far-reaching impact of the automatic stay. Virtually all legal proceedings against the debtor and other collection efforts must cease until the bankruptcy court grants relief. Violators of the stay risk contempt, actual damages, costs and attorneys’ fees, and possibly punitive damages.

Formal notice of the filing is not required to subject an attorney or creditor to the automatic stay. Once a creditor has received any indication that a bankruptcy has been filed, he or she should assume that the stay is in effect unless the nonexistence of a filing has been determined by inquiry at the bankruptcy court.

In virtually every instance, the bankruptcy court must grant permission for relief from the stay before litigation or other action to collect claims from the debtor may be taken. Nevertheless, the filing of a bankruptcy does not necessarily prevent continuing or even starting litigation to determine liability or, in some instances, taking action to collect on debts. In cases in which state court litigation is well advanced, consumers may wish to seek relief from the stay to continue the litigation in the state court for the limited purpose of deciding the amount of the claim. In other cases, there may be advantages to pursuing the litigation in the bankruptcy court.

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