Glossary · legal

Automatic stay

Also called bankruptcy stay, section 362 stay.

The injunction that takes effect the instant a bankruptcy petition is filed, halting collection against the debtor and the estate — and which does nothing at all for a personal guarantor.

Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.

What it means

No order is needed. Filing triggers it, under 11 U.S.C. §362.

What stops

Lawsuits and their continuation, judgment enforcement, levies and garnishments, repossession, foreclosure, setoff against deposit accounts, and collection contact. Acts taken in violation are generally void or voidable. The Code's damages provision, § 362(k)(1), gives "an individual injured by any willful violation of a stay" actual damages including costs and attorneys' fees and, in appropriate circumstances, punitive damages. Note the word individual: on the face of the statute that remedy runs to a natural person, so an owner whose company filed should not assume the company can use it.

What does not stop

Certain police and regulatory actions, some tax proceedings, criminal matters, and — the one that matters most to a small business owner — claims against non-debtor guarantors. If the company files and you guaranteed the debt personally, the stay protects the company and not you.

Relief from stay, and cash collateral

A secured creditor can move for relief, typically arguing that it lacks adequate protection, or that the debtor has no equity in the collateral and it is not necessary to an effective reorganisation. In a small business chapter 11 or a subchapter V case, motions on key collateral often arrive within weeks.

Separately, a lender with a lien on receivables and deposits has a lien on the cash they generate. The debtor cannot spend that cash without the lender's consent or a court order authorising the use of cash collateral. For a business that runs on collections, that restriction, rather than the stay, is the immediate operational crisis of the first fortnight.

Where this one catches people

Filing does not protect the owner, and that is the most common and most costly misunderstanding about it. Personal guarantees survive the company's bankruptcy untouched. The funders who took guarantees will move against the guarantor precisely because the corporate claim is stayed and the guarantee is not. A business owner who files to stop the daily debits and finds a personal suit served a fortnight later has bought the company some room and bought themselves a lawsuit.

Three further points. The stay does not reverse a levy that already cleared. It does not compel a payment processor to release a reserve it had already established. And while an ipso facto clause — one making the filing itself an event of default — is unenforceable in many contexts under the Bankruptcy Code, the practical result is a dispute rather than a clean answer.

Take insolvency advice before filing, not after. The sequencing decisions, particularly around guarantees and cash collateral, are largely irreversible.

Where you will meet this term

Merchant Cash Advance Working Capital Term Loan Business Line of Credit Equipment Financing Asset-Based Lending

Read next

BankruptcyA federal court process that halts collection and either liquidates a business or restructures its debts, wit… CollectionsWhat a funder does to recover a defaulted balance, from internal calls and restructures through third-party a… Cross-defaultA provision making a default under one agreement an automatic default under this one, so a breach you never n… Event of default (EOD)Any condition a contract lists as putting the borrower in default, most of which have nothing to do with miss… GarnishmentA post-judgment collection tool that orders a third party holding your money — a bank, a customer, a payment … GuarantorThe individual or entity who agrees to answer for a business's obligation if the business does not, putting p… JudgmentA court's final determination that one party owes another a sum of money, which converts a contractual claim … LevyThe actual seizure of funds or property to satisfy a debt, as opposed to a lien, which is only a claim agains… Personal guarantee (PG)An individual's separate promise to pay the business's obligation out of personal assets, enforceable even af… Right of offsetA creditor's right to apply funds it holds for you against what you owe it - most commonly a bank taking mone…

Sources and checks

Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.

  1. The stay arises automatically on the filing of a petition, with no order required definition
    "a petition filed under section 301, 302, or 303 of this title...operates as a stay, applicable to all entities, of—" the acts listed in subsection (a).
    Legal Information Institute, Cornell Law School — 11 U.S. Code § 362 - Automatic stay Verified against source Checked 10 Sep 2026 by Find Me Funders research desk
  2. The statutory damages remedy for a willful stay violation runs to "an individual injured", not to any injured party definition
    "An individual injured by any willful violation of a stay...shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."
    Legal Information Institute, Cornell Law School — 11 U.S. Code § 362 - Automatic stay corrected Checked 10 Sep 2026 by Find Me Funders research desk
  3. Criminal actions, governmental police and regulatory enforcement, and certain tax proceedings are excepted from the stay definition
    Section 362(b) excepts "the commencement or continuation of a criminal action or proceeding against the debtor", an action by a governmental unit "to enforce such governmental unit's police and regulatory power", and "an audit by a governmental unit to determine tax liability".
    Legal Information Institute, Cornell Law School — 11 U.S. Code § 362 - Automatic stay Verified against source Checked 10 Sep 2026 by Find Me Funders research desk
  4. A debtor cannot spend cash collateral without consent of each interested entity or a court order, which is the immediate operational constraint on a receivables-funded business definition
    "The trustee may not use, sell, or lease cash collateral ... unless—(A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale, or lease".
    Legal Information Institute, Cornell Law School — 11 U.S. Code § 363 - Use, sale, or lease of property Verified against source Checked 10 Sep 2026 by Find Me Funders research desk
  5. Ipso facto clauses — those triggered by the filing itself — are unenforceable in the contexts the Code reaches definition
    An executory contract or unexpired lease "may not be terminated or modified ... solely because of a provision in such contract or lease that is conditioned on—(A) the insolvency or financial condition of the debtor ...; (B) the commencement of a case under this title".
    Legal Information Institute, Cornell Law School — 11 U.S. Code § 365 - Executory contracts and unexpired leases Verified against source Checked 10 Sep 2026 by Find Me Funders research desk

Automatic stay — common questions

What does automatic stay mean?

The injunction that takes effect the instant a bankruptcy petition is filed, halting collection against the debtor and the estate — and which does nothing at all for a personal guarantor.

Where does automatic stay catch people out?

Filing does not protect the owner, and that is the most common and most costly misunderstanding about it. Personal guarantees survive the company's bankruptcy untouched. The funders who took guarantees will move against the guarantor precisely because the corporate claim is stayed and the guarantee is not. A business owner who files to stop the daily debits and finds a personal suit served a fortnight later has bought the company some room and bought themselves a lawsuit.

Is automatic stay the same as an interest rate?

Automatic stay is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does automatic stay apply to?

Merchant Cash Advance, Working Capital, Term Loan, Business Line of Credit, Equipment Financing, Asset-Based Lending.

Is there a worked example of automatic stay?

Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.

What else should I read alongside automatic stay?

Bankruptcy, Collections, Cross-default, Event of default, Garnishment.

Has this definition been checked?

Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.