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The "Automatic Stay" is NOT Monolithic

On August 31, 2018, this office secured a state court ruling assigning a judgment debtor’s earnings from the practice of law and an online business to the office’s client (who is an attorney).

The ruling is hardly remarkable. What IS remarkable is the obtuse argument made in an ostensible attempt to defeat the motion. Opposing counsel argued the state court was without power to act because the judgment debtor was protected by the automatic stay of Bankruptcy Code Section 362.

There are, in fact, continuing bankruptcy proceedings involving the judgment debtor. The existence of vestigial bankruptcy proceedings, however, does not itself establish a debtor is protected against judgment enforcement efforts by the so-called “automatic stay.”

The “automatic stay” of Section 362 of the Bankruptcy Code is not monolithic. It consists of a series of distinct prohibitions triggered by the filing of a petition in bankruptcy. Most of these prohibitions are designed to protect debtors and give them some “breathing space.” Accordingly, most of the prohibitions are phrased in terms of things that may not be done to the “debtor” or “property of the debtor.” At least one, however, is designed to benefit creditors. It consists of a prohibition to protect “property of the estate,” the property that is available for distribution to creditors.

Section 362(c) explains the termination of the automatic stay provisions. It contains a provision intuitively obvious to the most casual observer: The debtor loses the protections of Section 362 as soon as the debtor is “thrown out” of bankruptcy court, as when the case is dismissed or the debtor is denied a discharge. See 11 U.S.C. § 362(c)(2).

The debtor also loses the protections of Section 362 if the debtor is granted a discharge. 11 U.S.C. § 362(c)(2)(C). This result is not, however, counter-intuitive. When a debtor obtains a discharge he or she begins enjoying similar protections under Section 524, the “discharge injunction.”

As this office explained in the state court, the judgment debtor was denied a discharge and the denial of discharge, as one would reasonably expect, terminated any Section 362 “stay” provisions protecting the “debtor” or the “debtor’s property.” See 11 U.S.C. § 362(c)(2)(C). The fact that there are continuing proceedings in the bankruptcy court and the stay provisions continue in place insofar as they protect “property of the estate” does not mean the judgment creditors cannot seize a debtor’s post-petition assets to satisfy pre-petition debts.

Opposing counsel was Mark Ellis of Ellis Law Group, LLP.

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