16.3 Automatic Stay, Discharge & Paralegal Practice

Once the petition is filed, two doctrines dominate creditor and debtor practice: the automatic stay and the discharge. Domain 10 of the NALA CP Knowledge Exam expects you to know what the stay stops, what it does not stop, how creditors get relief from stay, how trustees claw back preferential and fraudulent transfers, which debts survive discharge, and where the paralegal ethics line sits. Keep the analysis federal and nationwide.

The Automatic Stay — 11 U.S.C. §362

The automatic stay is one of the most powerful injunctions in American law. It arises immediately upon filing — no separate court order is required — and generally prohibits creditors from:

• Commencing or continuing judicial, administrative, or other actions against the debtor to recover a pre-petition claim
• Enforcing a pre-petition judgment against the debtor or estate property
• Creating, perfecting, or enforcing liens against estate property
• Repossessing, foreclosing, or otherwise exercising control over estate property
• Collecting, assessing, or recovering a pre-petition claim (calls, demand letters, setoffs in many contexts)

The stay protects both the debtor (breathing spell) and creditors as a group (orderly collective process instead of a race to the courthouse).

Common Exceptions to the Stay

Not everything stops. High-frequency exceptions include:

Relief from Stay

A creditor may move for relief from the automatic stay. The court shall grant relief for cause, including lack of adequate protection of the creditor's interest in property (e.g., a car declining in value without insurance or payments). Relief is also available regarding property if the debtor has no equity and the property is not necessary to an effective reorganization (especially important in Chapter 11/13). Upon relief, the creditor may resume foreclosure or repossession as authorized by nonbankruptcy law. Paralegals calendar response deadlines on stay-relief motions and assemble adequate-protection evidence (payment histories, appraisals, insurance binders) for counsel.

Preferential and Fraudulent Transfers

Trustees (and DIPs) can avoid certain pre-petition transfers to bring value back into the estate for fair distribution.

Preferential transfers — §547. Elements typically include a transfer of the debtor's interest in property, to or for the benefit of a creditor, on account of an antecedent debt, made while the debtor was insolvent (presumed during the 90 days before filing), made within 90 days before filing (or one year if the creditor was an insider), that enables the creditor to receive more than it would in a Chapter 7 liquidation. Ordinary-course-of-business and contemporaneous-exchange defenses often protect routine payments. Exam idea: paying a favorite unsecured cousin in full three weeks before filing, while other creditors get nothing, is the classic preference pattern.

Fraudulent transfers — §548 (and parallel state law via §544). Transfers made with actual intent to hinder, delay, or defraud creditors, or for less than reasonably equivalent value while the debtor was insolvent (constructive fraud), may be avoided if within the look-back period (generally two years under §548; longer under many state laws). Selling a boat to a sibling for $1 on the eve of bankruptcy is the classic fact pattern.

Discharge Versus Dischargeability

Discharge is the court order that extinguishes the debtor's personal liability on dischargeable debts and enjoins creditors from collecting them as personal obligations. It is the heart of the fresh start. Corporations do not receive a Chapter 7 discharge; individuals do if eligible and if no denial grounds apply (fraudulent concealment, failure to keep records, false oaths, prior discharge within time limits, etc.).

Dischargeability asks whether a particular debt is excepted from discharge even if the debtor receives a general discharge. Under §523, commonly nondischargeable debts include:

• Certain tax debts (priority income taxes within look-back rules; trust-fund taxes)
• Domestic support obligations (alimony, maintenance, child support)
• Debts obtained by false pretenses, false representations, or actual fraud
• Debts for willful and malicious injury to person or property
• Debts for death or personal injury caused by drunk driving
• Most student loans, unless the debtor proves undue hardship (a demanding judicial test — generally nondischargeable on standard exam answers unless hardship is expressly found)
• Certain fines, penalties, and restitution owed to governmental units

A creditor seeking to except a fraud or willful-injury debt usually must file a timely adversary proceeding. Support and many tax exceptions are nondischargeable even without a special action.

Chapter 13 Discharge Differences

A Chapter 13 discharge after plan completion can be broader than Chapter 7 in some categories historically labeled the "super discharge," though BAPCPA narrowed many advantages. Still, expect exam contrasts: Chapter 13 can help cure mortgage arrears through the plan while keeping the home, and some debts treated harshly in Chapter 7 may be paid through the plan. Domestic support and most student loans remain problematic. A hardship discharge may be available if the debtor cannot complete the plan for reasons beyond control, but it is narrower than a full completion discharge.

Reaffirmation

A reaffirmation agreement is a voluntary contract between debtor and creditor that the debtor will remain personally liable on a debt that would otherwise be discharged — often used to keep a car subject to a purchase-money security interest by continuing payments. Reaffirmations require detailed disclosures, attorney certification (or court approval if the debtor is unrepresented), and must be filed before discharge. They are scrutinized because they undercut the fresh start; pressure from a creditor to reaffirm without counsel review is an ethics and consumer-protection red flag.

Paralegal Role and UPL Boundaries

Bankruptcy is a magnet for unauthorized practice of law (UPL) problems. Under NALA ethics expectations and ABA Model Rule principles applied through supervising attorneys:

• Paralegals may interview clients for facts, gather documents, draft petitions/schedules for attorney review, file documents as directed, calendar §341 meetings, and communicate logistical information.
• Paralegals may not advise a client which chapter to file, whether a debt is dischargeable, how to hide assets, or "what will happen if you stop paying" as legal advice — those are attorney functions.
• Non-attorney petition preparers are federally regulated, must give disclosures, and may not provide legal advice; exceeding that role is UPL and can bring fines and injunctions.
• Always work under attorney supervision; the attorney reviews and remains responsible for the filing.

Paralegal Scenario and Exam Traps

A secured auto lender moves for relief from stay, arguing the debtor missed two post-petition payments and let insurance lapse. You draft an opposition package showing the debtor's proposed adequate-protection order (cure plus insurance binder) for attorney revision. Separately, the trustee demands return of a $9,000 payment the debtor made to her brother-in-law (an insider) eight months before filing on an old personal loan — you recognize the one-year insider preference window and gather bank records. At discharge time, the Department of Education creditor does not need an adversary proceeding for the student loans to survive — they are generally nondischargeable absent undue hardship. When the client asks you privately, "So my student loans are gone, right?" you decline to answer, schedule a call with the attorney, and document that you did not give legal advice.

Common exam traps: (1) saying the stay requires a separate injunction motion to take effect — it is automatic on filing; (2) treating criminal prosecution as stayed; (3) confusing discharge (wipes personal liability) with denial of discharge (debtor loses the fresh start entirely) and nondischargeability (only listed debts survive); (4) assuming all student loans are easily discharged — generally they are not; (5) allowing a paralegal to counsel chapter choice — that is UPL without an attorney.