Thursday, February 25, 2016

The automatic stay in bankruptcy

Here at Shenwick & Associates, we play for both sides–both debtors and creditors.  One issue that both debtors and creditors are intensely concerned about is the “automatic stay” imposed by § 362 of the Bankruptcy Code.  The automatic stay is an injunction that tolls legal actions by creditors (with a few limited exceptions) against debtors.  The automatic stay takes effect when a bankruptcy petition is filed.

In many cases, debtors contact us prior to a court hearing or a foreclosure sale to invoke the protection of the automatic stay to stop these proceedings.  In the case of a debtor who’s a party to a collection action, once the bankruptcy petition is filed, the collection is stayed and barring a successful objection to the discharge of the debt, the debt will be discharged in bankruptcy (the exceptions to discharge are complex, vary from chapter to chapter and are beyond the scope of this article).  Although the automatic stay stops enforcement mechanisms in actions (such as debt collection and foreclosure sales) and the commencement or continuation of legal proceedings, it does not bar the ministerial act of entry of judgment against a debtor.

From the creditor’s perspective, the automatic stay serves to bar the creditor from exercising their rights and remedies under applicable non–bankruptcy law.  Fortunately, there are some strategies that creditors can use to obtain relief from the automatic stay.  If a debtor has a pending bankruptcy case and files a new case, a new filing will be presumptively considered to be in bad faith; the automatic stay in the new case will only last for 30 days, unless a request to continue the automatic stay is made by a party in interest and the debtor can demonstrate that the new case was filed in good faith.  And if a debtor has had two pending cases in the past year, the third filing will not trigger the automatic stay without an order from the bankruptcy court.

However, the primary method for creditors to circumvent the automatic stay is by filing a motion for relief from the automatic stay pursuant to § 362(d) of the Bankruptcy Code, which provides that:

On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—for cause, including the lack of adequate protection of an interest in property of such party in interest; with respect to a stay of an act against property under subsection (a) of this section, if—the debtor does not have an equity in such property; and such property is not necessary to an effective reorganization

“Adequate protection” is discussed in § 361 of the Bankruptcy Code, and is required to protect secured creditors from a decrease in the value of their collateral between a bankruptcy filing and confirmation of a plan.  Section 361 lists several examples of adequate protection, including single or periodic cash payments.

 Although § 362(d)(1) specifically references adequate protection, that’s only one example of “cause,” which can also include the filing of a Chapter 13 plan in bad faith or the Debtor’s failure to make post–petition payments on the secured claim.
With respect to § 362(d)(2), the Supreme Court has held that once a party moving for relief from the automatic stay establishes that a debtor has no equity in a property, it’s the burden of the debtor to establish that the collateral at issue is necessary to an effective reorganization.  Section 362(g) places the burden of proof regarding the Debtor’s equity in property on the party moving for relief from the automatic stay, but the burden of proof on all other issues is on the party opposing relief.

Whether you’re a debtor or a creditor, please contact Shenwick & Associates to discuss how the automatic stay in bankruptcy will affect your rights.