The Automatic Stay and MCA Daily Debits: What Stops the Moment You File

The filing itself supplies the order creditors wait to receive, and the wait ends before notice arrives. A bankruptcy petition operates as a stay against covered collection activity by force of law, which means debits that collect a debt from before the case fall under a federal prohibition the moment the clerk stamps the petition.

Most owners learn of this protection after months of withdrawals have trained them to expect none. I understand the fatigue behind that delay.

The protection is real and narrow, and the distance between those facts is where MCA disputes live.

Collection Activity Covered by Section 362

Section 362 opens with a catalog, and the catalog repays close reading. It stays suits to recover claims from before the case, enforcement of judgments from before the case, acts to obtain possession of property of the estate or to exercise control over it, and, in the words of paragraph (a)(6), any act to collect, assess, or recover a claim that arose before filing. A debit drawing on the business account for a prepetition MCA balance sits inside that final clause, with paragraph (a)(3) beside it where the funds drawn are property of the estate.

Before notice reaches the funder, before the processor updates its schedule, the prohibition is already in effect. No separate order brings it into being. The Chapter 7 guide from the federal courts states that the stay arises by operation of law, a phrase worth keeping whole.

Three matters this year reached counsel only after the tenth postpetition debit, each file thicker with bank records than with pleadings. Most funders understand what a petition means. They prefer to test whether anyone will enforce what it means.

Counsel should assess the actual agreement, because the provider characterizes the advance as a purchase of future receipts in order to deny that any claim is being collected, and the label on the contract does not decide that question by itself. The full text of Section 362 of the Bankruptcy Code sets out the covered acts with their qualifications.

Debits That Post After the Petition Date

On the morning of filing, the account may still show movement. A debit initiated before filing can post after it, and the answer turns on the initiation date, the ownership of the funds, and whether notice had reached the party that acted.

Preserve the balance and the pending transaction view at filing where available. Those records distinguish an earlier instruction from a fresh collection attempt. The ledger otherwise keeps growing like ivy over a wall no one claimed, green and unhurried and indifferent to the dispute beneath it.

Notice remains the practical hinge of the whole dispute.

Send the petition number tonight. Argue about the characterization next week.

Often the same case information reaches the funder three times and the servicer who controls the schedule never once. A servicer, a funder, and unfamiliar counsel may each need the same facts through a different channel. The stay provides time inside a legal process, not a completed recovery.

Whether a processor without direct notice violates the stay by running a scheduled file turns on records far fuller than the files owners keep. Exceptions exist, though few files that reach counsel turn on them. The bank needs paper, though the amount seems to depend on the representative who answers.

Resist the urge to move receipts through an undisclosed account to force the issue. The Code requires accurate disclosure. Record each postpetition entry with amount, date and recipient. A vague account supports nothing, and counsel cannot carry an approximation into a hearing where dates decide.

The Debtor and the Property Protected

An LLC that files does not carry its guarantors through the door with it. The company is the debtor, and the separate promise of the owner may remain collectible outside the company case. That is why the signature pages deserve an evening of their own.

The debt belonged to the company. The protection belongs to the filer. The filer, that is, with the property of the estate beside it. Counsel maps each obligation to its maker, to protect and preserve each party from answering for the other.

The reverse holds with equal force. A personal case stays action against the owner while the operating company answers for its own accounts. You sign the guaranty and then you discover what the guaranty means. Clerks in some districts docket within the hour while others take the day.

Limits, Exceptions and Relief From the Stay

Section 362 contains exceptions, and creditors may seek relief for cause, including the lack of adequate protection. The stay is automatic. Relief from it requires a motion. The sampled exceptions reach criminal proceedings and specified domestic support matters, and the full catalog belongs to counsel rather than to this page.

Repeat filings narrow the ground further. A dismissal within a year of another pending case can shorten the stay to thirty days unless extended, and more than one dismissal can prevent any stay from arising without a court order. Duration follows the statute: acts against property of the estate are stayed while it remains there, and other stays last until the case closes, the case is dismissed, or discharge is granted or denied.

A Settlement Discussion Before Filing

And where no petition has been filed, no stay exists to discuss. Delancey Street is a debt settlement company that negotiates business debt, and it does not create bankruptcy protection through enrollment. Owners sometimes describe a negotiation as though a court stood behind it.

A private agreement can still supply a contractual pause where the creditor accepts one in writing. Counsel should review and analyze that pause for scope and conditions, since an agreed delay differs in kind from the statutory bar. A missed litigation deadline will not honor the difference between the two. Ensure that the cash forecast separates relief proposed from relief in effect, and ensure also that counsel holds every live deadline in the meantime.

I drafted a response of this kind on a Friday afternoon in August, which may account for its impatience with informal promises. Paper bearing no stamp binds only the parties who signed it.

Every collection dispute tests the same discipline: match the remedy to the forum that supplies it, and let counsel decide whether the forum should be a conference table or a court. Consultation with Delancey Street is where the private part of that inquiry begins, while independent counsel supplies the legal steps that make the chosen result effective.