In an environment where the revenue picture is blurry, 20/20 hindsight on delinquent bills can overtake your vision. In times like these, the cash lost to people who haven’t paid up on your invoice is too much pain to bear. Hence, it is a common for debt collection and lawsuits to increase in a downturn.

But the debtors are not without legal tools. In fact, if they aren’t afraid of the “B” word, they can lock their creditors out. The B word is none other than bankruptcy. And when a debtor company hits the B button (which in fairness may be a legitimate maneuver), the “automatic stay” can literally erase your lawsuit for unpaid bills. 

In fact the “protection” in “bankruptcy protection” usually refers to the automatic stay, which comes into play the moment the bankruptcy filing is made.

The automatic stay is a statutory tool that amounts to an injunction to freeze nearly any collection actions against the debtor for debts incurred prior to the bankruptcy filing. And the “automatic” refers to the fact that the debtor does not even have to seek a court order for the stay. The automatic stay puts a pause on: lawsuits, foreclosures, collections, and others.The automatic stay is not a scarecrow. It is a very potent weapon that should cause a creditor pause. In fact, creditors should avoid violating an automatic stay at all. Not only does commencing a lawsuit after a stay violate the stay, thereby voiding the lawsuit, but it could actually expose the creditors to a reverse claim for damages from the debtor! 

As with all things legal, the automatic stay is not without ways to poke holes. Creditors can ask the bankruptcy court to allow a lawsuit to continue. However, more often than not these requests are denied. So when chasing down that someone who hasn’t paid their bills, one should factor the debtor’s financial state and the possibility that a bankruptcy filing may be on the horizon into the financial calculus of a lawsuit.