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Automatic stay
STOP! That is the message of the automatic stay to virtually all of a debtor's creditors, secured and unsecured, when a petition under any chapter of the Bankruptcy Code (e.g. Chapter 7, 11, or 13) has been filed by or against the debtor. The automatic stay, in section 362(a) of the Bankruptcy Code, is the bankruptcy equivalent of a temporary injunction against virtually all creditor activity that might have the effect of advancing the creditor's interest at the expense of the debtor or property of the debtor's estate. See . The automatic stay provides the debtor immediate calm amidst the storm of its financial difficulties. As noted in the relevant Senate Report:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.
Notes of Committee on the Judiciary, Senate Report No. 95-989.
To emphasize and illustrate: a creditor with a claim that arose before commencement of the bankruptcy case cannot contact the debtor requesting or demanding payment, cannot request from the debtor security for existing unsecured or undersecured debt, cannot initiate a lawsuit against the debtor or pursue litigation activities in a pending lawsuit against the debtor, cannot attempt to enforce a judgment against the debtor and must act to stop enforcement activities that are already in motion (e.g. notify a sheriff to stop a wage garnishment or to refrain from a scheduled execution sale), cannot perfect a lien against property of the estate, cannot repossess collateral that is property of the estate, and cannot initiate or pursue non-judicial or judicial foreclosure against property of the estate.
This debtor protection is truly automatic. No hearing is held, no judge's signature required. It is invoked simply by the stamp of the bankruptcy clerk's time clock when a petition is presented for filing. Creditors are bound by the automatic stay even before they know of it, but sanctions attend only wilful violations (see Bankr. Code 362(h)).
There are some exceptions to the automatic stay (see Bankr. Code 362(b)) that we do not explore in these materials, and the stay does not preclude a creditor from taking action against any entity other than the debtor (e.g. a co-debtor, guarantor, or insurer).
The automatic stay is temporary. It terminates automatically upon the occurrence of specified events (see Bankr. Code 362(c)). Also, upon an appropriate showing in a noticed hearing in bankruptcy court, creditors may obtain relief from the stay that either annuls, terminates, or modifies the stay, or conditions continuance of the stay upon certain events, such as interim payments by the debtor to the secured creditor (see Bankr. Code 362(d) and Bankr. Code 361). A secured creditor may seek relief from the stay in order to pursue its state law rights against the collateral or may seek relief from the stay as a way to force a debtor to make interim payments to the secured creditor as a condition to the stay remaining in effect. In these materials, we consider only the most common circumstances under which secured creditors seek relief from the automatic stay and the grounds upon which the bankruptcy court will grant relief.
Relief from stay in a consumer Chapter 7
Creditors secured by liens on personal property do not often seek
relief from the automatic stay in a consumer Chapter 7 case. With respect to much of
the collateral securing debt in a consumer Chapter 7 case - - an automobile, household
furnishings, or jewelry - - other solutions are common: (1) the debtor continues payments
of the secured debt, uninterrupted by the filing of the bankruptcy petition; or, (2) the
debtor reaffirms the secured debt and begins making payments under the reaffirmation
agreement; or, (3) the debtor redeems collateral from the lien; or, (4) the debtor
surrenders the collateral to the secured creditor. See Commentary.Consumer
Chapter 7. If the debtor does none of the above, the creditor may simply wait until the grant of discharge and then pursue its state
law remedies against the collateral.
A secured creditor of a Chapter 7 debtor is most likely to seek
relief from stay and not await automatic termination of the stay in three situations:
(1) When property of significant value, such as an automobile, is
uninsured or is otherwise subject to unacceptable risk;
(2) When property of significant value, such as an automobile, is
depreciating rapidly and the creditor has reason to believe that the debtor will not
promptly surrender the collateral, reaffirm the debt secured by the collateral, or redeem
the collateral from the lien;
(3) When the creditor holds a consensual lien on a debtor's
residence and the debtor has defaulted on mortgage payments and appears unable to maintain
continuing mortgage payments or promptly cure arrearages.
Relief from stay in Chapter 13
A secured creditor of a debtor in Chapter 13 (except a creditor
secured only by a lien on real property used as the debtor's principal residence) faces
the prospect of a repayment plan forced upon it if the bankruptcy court confirms the
debtor's plan. Confirmation usually follows the filing of a petition by fewer than six
months. Thus, unless the secured creditor is concerned about uninsured property having
significant value, or unless the secured creditor seriously doubts the likelihood of
prompt confirmation of a plan, the expense of seeking relief from stay may not justify the
benefit. Moreover, as suggested by In re Radden,
it may be difficult for the secured creditor to prevail on a motion seeking relief from
stay.
As in a Chapter 7 case, a secured creditor with a consensual lien
on a Chapter 13 debtor's residence will often seek relief from stay in order to foreclose
if the debtor is in arrears on mortgage payments and if it appears unlikely that the
debtor will be able to fund a plan that both cures arrearages and maintains ongoing
mortgage payments.
Relief from stay in Chapter 11
Motions for relief from stay are more common in Chapter 11 cases
because of the typically lengthy delay between the filing of a Chapter 11 petition and the
confirmation of a Chapter 11 plan, the concomitant time value of the funds that
foreclosure on collateral would generate, and because a secured creditor may be skeptical
of the debtor's ability to successfully reorganize and pay the value of the collateral
through a confirmable Chapter 11 plan.
Faced with lengthy delay and uncertainty about the prospects for
successful reorganization, a motion for relief from stay can force the issue promptly. In
some cases, even if the bankruptcy court refuses to lift the stay to permit foreclosure,
it will order the debtor, as a condition to continuation of the stay, to make interim
payments to the secured creditor, either to protect the secured creditor against
depreciation in the value of the collateral pending confirmation of a plan or, if the
secured creditor's equity cushion is small, to prevent erosion of the equity cushion by
the accumulation of interest on the debt. In other cases, such as In Re Rogers Development Corp., the court will
deny relief from the stay, at least temporarily, when it concludes that the secured
creditor's interest in collateral will not immediately be jeopardized by the passage of
time necessary for the debtor to confirm a plan of reorganization. The opinion in that
case nicely reveals the contours of common factual and legal issues involved in a motion
for relief from stay and implies how and when a debtor and a secured creditor may
negotiate a solution short of litigation in the bankruptcy court.
In the Bankruptcy Reform
Act of 1994, Congress added sections 362(d)(3)
and 101(51B) to the Bankruptcy
Code in an attempt to assure expeditious disposition of "single asset real
estate" cases by granting an additional ground for relief from the automatic stay.
Several years earlier, in United Savings Association v. Timbers of Inwood Forest,
484 U.S. 365 (1988), the United States Supreme Court held that the opportunity
costs imposed by the automatic stay on an undersecured creditor did not give such a
creditor cause to lift the stay. This facilitated delay by debtors in their proposal of a
plan of reorganization - - to the detriment of undersecured creditors - - if there were no
demonstrable depreciation in or other threat to the value of the collateral (and thus no
ground for relief under Bankr. Code 362(d)(1))
and if there were some possibility of an effective reorganization (and thus no ground for
relief under Bankr. Code 362(d)(2)). Congress
found this delay particularly offensive in the context of single asset real estate (e.g. a
debtor whose single asset is an apartment complex or raw land held for development).
Accordingly, in such a context, Bankr. Code 362(d)(3) requires either the prompt filing of
a plan of reorganization with a reasonable possibility of confirmation within a reasonable
time or the prompt commencement of appropriate interest payments to creditors whose claims
are secured by an interest in the real estate (other than by a judgment lien or unmatured
statutory lien), even if such creditors are undersecured.