The Police and Regulatory Power Exception to the Automatic Stay

The police and regulatory power exception to the automatic stay, codified at 11 U.S.C. § 362(b)(4), lets a governmental unit keep enforcing health, safety, and other regulatory laws against you after you file for bankruptcy. The agency can investigate, sue, and even obtain a judgment establishing your liability. What it cannot do is enforce a money judgment against estate property; to collect dollars, it has to file a proof of claim and wait in line like any other creditor.¹

What the Exception Covers

Section 362(b)(4) exempts any action or proceeding by a “governmental unit” to enforce its police and regulatory power, including the entry (but not the enforcement) of non-money judgments obtained in such proceedings.¹ “Governmental unit” is defined broadly and reaches federal agencies like the EPA and SEC, state governments, municipalities, and foreign governments.²

Congress wrote the exception to let agencies “pursue actions to protect the public health and safety.” The legislative history is just as explicit about what the exception is not for: it does not reach actions aimed at protecting the government’s financial interest in the debtor’s property or in the bankruptcy estate.³ An EPA order to clean up a site, a health department order shutting down a restaurant, a consumer protection suit to stop a fraud scheme — all fit. A city trying to collect on a loan it made to the debtor does not, no matter how the city labels its complaint.

The Money Judgment Ceiling

This is where the exception has real teeth for debtors. The statute allows the agency to litigate to judgment, but it carves out the enforcement of money judgments.¹ A regulator can sue you, prove violations, and secure a judgment for a large civil penalty. It cannot seize bank accounts, garnish wages, or lien estate property to collect that penalty while the case is open.

Non-money relief is a different matter. Injunctions ordering you to stop polluting, consent decrees requiring ongoing compliance, and court orders mandating specific remedial work remain fully enforceable. The split is clean: the government can make you do things, but it cannot take your money outside the bankruptcy distribution process. To collect dollars, the agency has to file a proof of claim with the bankruptcy court and take its place under the priority rules that govern every creditor.⁴

How Courts Decide Whether an Action Really Qualifies

The label an agency puts on its action does not control. When a debtor argues the government is really collecting money dressed up as regulation, bankruptcy courts apply one or both of two tests developed in the case law.⁵

Pecuniary Purpose

The first test asks whether the government is primarily protecting the public or primarily recovering money for its own treasury. Courts have framed this as whether the proceeding would give the government “a pecuniary advantage vis-à-vis other creditors of the debtor’s estate.” If it would, the action is ordinary debt collection and the exception does not apply.⁵

A city suing to collect a commercial loan looks identical to a private creditor’s collection effort and stays frozen. The same city suing to stop that business from dumping waste into the sewer is regulatory, even if compliance costs the debtor real money. The focus is the government’s purpose, not the debtor’s expense.

Public Policy

The second test asks whether the action advances a genuine public interest or just resolves a private dispute. Stopping contaminated food from reaching shelves or halting deceptive advertising clears the test. Stepping in to enforce one party’s private settlement against the debtor usually does not.⁵ An agency investigating a company for defrauding consumers at large is enforcing public policy. The same agency trying to collect a monetary award that benefits only one consumer starts to look like adjudication of a private right, which belongs to the bankruptcy court.

What This Looks Like in Practice

Four categories of enforcement show up repeatedly under this exception.

Environmental Cleanup

Environmental enforcement is the textbook case. The EPA and state environmental agencies can compel cleanup of hazardous waste, remediation of contaminated soil, and the shutdown of ongoing pollution even when compliance is expensive. In Midlantic National Bank v. New Jersey DEP, the Supreme Court held that a bankruptcy trustee cannot abandon contaminated property to escape cleanup obligations without conditions that “adequately protect the public’s health and safety.”⁶ Cleanup costs incurred after the bankruptcy filing may qualify as administrative expenses, giving them priority over general unsecured claims.⁷

Labor Law

The National Labor Relations Board keeps its authority over unfair labor practice claims against a debtor or debtor-in-possession. Courts have recognized that the NLRB has exclusive authority to decide whether an unfair labor practice occurred, and a bankruptcy filing does not strip that jurisdiction.⁸ Employees still have their statutory protections against an employer in bankruptcy.

Consumer Protection and Securities

The SEC and state attorneys general routinely continue fraud and deceptive-practice actions during bankruptcy. The SEC can seek injunctions and, where necessary to keep assets from being dissipated before judgment, temporary asset freezes.¹ The contested line is between preserving assets and actually collecting a money judgment, and courts have blocked SEC efforts that crossed into enforcing money judgments against estate property. State consumer protection authorities can halt fraudulent operations and obtain cease-and-desist orders; collecting monetary penalties still runs through the claims process.

Professional Licensing

State licensing boards can generally continue disciplinary proceedings during bankruptcy, because revocation or suspension of a license is regulatory, not a money judgment. Medical boards investigating physicians and bar authorities examining attorney conduct are exercising classic police power. The Code also contains a specific provision confirming that state bodies can act on an educational institution’s licensure during a bankruptcy case.⁹ For other professions, § 362(b)(4) supplies the authority.

When the Government Oversteps

If a government agency presses an action that does not actually qualify, you can ask the bankruptcy court to enforce the stay. The court will run the same pecuniary purpose and public policy tests and decide whether the exception applies. A willful violation entitles an individual debtor to actual damages, costs, and attorney’s fees; in egregious cases, courts can award punitive damages.¹⁰ “Willful” does not require malice. If the creditor knew about the filing and intentionally took the action, that is enough.

Government agencies are not shielded. Federal bankruptcy law explicitly waives sovereign immunity for stay violations, so a court can enter a money judgment against the offending governmental unit.¹¹ Two limits apply: punitive damages are not available against a governmental unit, and attorney’s fees and costs are governed by 28 U.S.C. § 2412, which generally caps fees at $125 per hour absent special circumstances justifying a higher rate.

Related Exceptions You May Be Thinking Of

Two other carve-outs often get confused with the regulatory exception, and both are broader on the money question.

Criminal proceedings. Section 362(b)(1) states flatly that the automatic stay does not apply to criminal actions against the debtor. There is no balancing test and no money-judgment limitation.¹² A pending prosecution continues through trial and sentencing, and multiple federal circuits have held that collection of criminal restitution under the Mandatory Victims Restitution Act proceeds despite the stay because the restitution statute’s broad language overrides any conflict. Civil conduct that becomes a criminal case leaves the government free to collect restitution; the same conduct in a civil enforcement posture does not.

Tax audits and assessments. Section 362(b)(9) allows the IRS and state tax authorities to continue audits, issue deficiency notices, demand unfiled returns, and make assessments during your bankruptcy case.¹³ A tax lien arising from a post-filing assessment does not attach to estate property unless the tax will not be discharged and the property has been transferred out of the estate back to you. That limit keeps routine assessments from functioning as a quiet seizure of estate assets.

1
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
2
Legal Information Institute. 11 USC 101(27) – Governmental Unit Definition
3
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay – Section: Legislative Statements
4
United States Department of Justice. Civil Resource Manual 62 – Claims in Bankruptcy
5
National Bankruptcy Review Commission. Police and Regulatory Exception Under 11 USC 362(b)(4) and (b)(5)
6
Legal Information Institute. Midlantic National Bank v New Jersey DEP
7
United States Environmental Protection Agency. Guidance on EPA Participation in Bankruptcy Cases
8
United States Department of Justice. Civil Resource Manual 56 – Bankruptcy and Government Regulator Part III
9
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay – Section: 362(b)(15)
10
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay – Section: 362(k)
11
Office of the Law Revision Counsel. 11 USC 106 – Waiver of Sovereign Immunity
12
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay – Section: 362(b)(1)
13
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay – Section: 362(b)(9)