Automatic Stay Prevents Lawsuits Against Detroit

Last Wednesday, the bankruptcy judge overseeing the Detroit bankruptcy case put a hold on all lawsuits that were challenging Detroit’s bankruptcy filing, as well as most other litigation against Detroit. However, this does not mean an end to Detroit’s legal troubles. The bankruptcy judge pointed out that his ruling did not decide whether Detroit could modify its pension benefits in bankruptcy, or even whether Detroit was eligible for bankruptcy protection.

Further, litigants can still try to seek relief from stay, allowing them to continue their lawsuits outside of bankruptcy court. Additionally, just because state and federal court litigation was put on hold doesn’t mean litigation can’t occur in the bankruptcy court itself. In fact, this is what the bankruptcy judge wants to occur. The judge believes that having the issue of Detroit’s eligibility for bankruptcy litigated in one forum will save Detroit both time and money, which will give Detroit a better chance at a successful reorganization.

As the Detroit bankruptcy case shows, the automatic stay is a very powerful thing. Fortunately for debtors, the automatic stay is not limited to municipal bankruptcies. If an individual files for bankruptcy, he or she will also benefit from the automatic stay. This means that all lawsuits against him or her, as well as foreclosures and other collection actions, will be put on hold.

Source: Robert Snell and Chad Livengood, The Detroit News, “Judge rules he has sole jurisdiction in Detroit bankruptcy, freezes suits against city, Snyder, EM,” July 24, 2013.