Automatic Stay - Bankruptcy
The automatic stay
in a bankruptcy case acts as a temporary injunction against most efforts to collect pre-bankruptcy debt. 11 USC 362
Table of contents for this topic:
The stay protects both the bankrupt debtor and the Bankruptcy Estate
. With regard to the debtor, the temporary injunction of the automatic stay ends with, and is replaced by, the permanent injunction of the Bankruptcy Discharge
. However, it continues with regard to the bankruptcy estate if the trustee continues to administer assets.
Keep in mind that relief from stay does not remove property from the bankruptcy estate.
In some circumstances a creditor must take affirmative action to avoid violating the stay. For example, in Thompson v. GMAC
, case no. 08-2077
, 566 F.3d 699 (2009), the creditor violated the stay by refusing to return to a Chapter 13 debtor a motor vehicle that the creditor had repossessed before the bankruptcy filing.
In other situations a creditor may temporarily violate the stay, but only for so long as is required to seek relief from the bankruptcy court. For example, in Citizens Bank of Md. v. Strumpf
, 516 U.S. 16
(1995), the Supreme Court allowed a bank to place an administrative freeze on an account to preserve the status quo while it sought relief from stay to do a set off.
- 11 USC 922 - Automatic stay of enforcement of claims against the debtor
Exceptions to stay
The semi-automatic and manual stays
As a general rule, the §362 stay arises automatically in almost every bankruptcy case. There are two substantial exceptions to that rule: First, if the debtor was in a prior Chapter 7, 11 or 13 within the past year and that case was dismissed then the stay expires 30 days after the filing of the new case unless the court orders otherwise. 11 USC 362
(c)(3). Second, if the debtor was in two prior cases (including a Chapter 12) that were dismissed within one year then there will be no
stay in the new case unless the court orders otherwise. 11 USC 362
Termination of stay
Termination of the stay - during the case
The stay may terminate as to property that secures a pre-petition debt if the debtor fails to timely file the statement of intentions required under 11 USC 521
(a)(2) or to timely perform those intentions. 11 USC 362
The stay may also terminate as to leased personal property. In a Chapter 7 this occurs if the Trustee does not timely assume the lease. 11 USC 365
(p)(1). In a Chapter 13 this occurs if the confirmed plan does not provide for the lease to be assumed. 11 USC 365
Termination of the stay – at the end of the case
The stay is terminated as to assets of the bankruptcy estate
as to the Trustee) when those assets are “no longer property of the estate.” 11 USC 362
(c)(1). Usually this occurs when the case is closed. 11 USC 554
The stay is terminated as to the debtor
when the discharge is granted (at which point the discharge injunction replaces the stay). 11 USC 362
(c)(2). If there is no discharge then the stay terminates as to the debtor at the earlier of the dismissal or closing of the case. Id.
Perfection allowed under 11 U.S.C. § 546(b) - 362(b)(3)
Timely acts to perfect purchase money security interests under UCC 9 317
(e) are excepted from the stay under 362(b)(3) (excepting from the stay perfection of security interests that 11 USC 546
(b) exemption from Trustee avoidance).
Presentment of a negotiable instrument - 362(b)(11)
Payday lender's post-petition deposit of pre-petition check did not violate stay. However, any funds paid as a result of the deposit constitute a transfer of property of the estate that may be set aside under 11 USC 549
. In re Webb
, 432 B.R. 234 (Bankr.N.D.Miss. 2010).
Creditors may propose a reaffirmation
agreement without violating the stay - if they do so in a way that is not threatening or coercive.
Relief from stay
A creditor may request an order “terminating, annulling, modifying, or conditioning” the stay under certain circumstances. 11 USC 362
(d). The most common grounds for relief are (a) “cause, including a lack of adequate protection” and (b) lack of debtor equity in collateral which the debtor does not need for a reorganization. See 11 USC 362
Relief from stay is just that and nothing more. It only grants your client permission to proceed with whatever non-bankruptcy remedies it had before the bankruptcy began. While often ignored as a practical matter, as a matter of law the bankruptcy estate ( i.e.
, the trustee) retains whatever interest it had before relief from stay was granted. So, for example, unless the relief from stay is combined with an order for abandonment, any state court foreclosure or replevin should theoretically include the bankruptcy estate as an additional party-defendant.
A request for relief from stay is made by motion. Bankruptcy Rule 9014
. Or, if the debtor and trustee consent, by stipulation (saving the cost of the filing fee).
The notice should be substantially similar to Official Form 20A
and may be served, along with the motion, by mail. Bankruptcy Rules 9014
(b) & 7004
(b). Additional notices and disclosures may be required if the Fair Debt Collection Practices Act applies. 15 U.S.C. §1601, et seq.
By custom, the notice gives parties 14 days to object to the requested relief. Expedited relief is available under 11 USC 362
In Chapter 7 and 13 cases service should be on the debtor and, if the debtor’s attorney does not participate in CM/ECF (the court electronic noticing system), to the debtor’s attorney. Bankruptcy Rules 4001
(b)(9). (The Trustee, the United States Trustee and, if the debtor’s attorney participates in CM/ECF, the debtor’s attorney will receive an electronic copy of the notice and motion when the motion is filed.) If additional relief is requested then broader notice may be required. For example, a request for abandonment of the asset by the bankruptcy estate ( i.e.
, the Trustee) under 11 USC 554
(b) must be on notice to all parties in interest. Bankruptcy Rule 6007
Proof of service should be filed with the notice and motion. There is a $150 filing fee for a motion for relief from stay (but not for a motion to approve a stipulation that includes relief from stay).
No hearing is required unless a party in interest objects to the motion. 11 USC 102
(1) & Bankruptcy Rule 9014
If an objection to relief from stay is filed then the court must hold a hearing within 30 days of the date the motion was filed. 11 USC 362
(e)(1). Usually this requirement is met with a telephonic conference scheduled within the 30 day period. The court must rule on the motion within 60 days of the date it was filed. 11 USC 362
If the matter goes to hearing then the movant has the burden to show that the debtor has no equity in the subject property (if that is at issue) and the party opposing the motion has the burden as to all other matters. 11 USC 362
For creditor counsel
Avoid 10 day delay.
Include in a motion for relief from stay a request that the Court grant relief "without a Bankruptcy Rule 4001
(a)(3) stay." Otherwise the stay won't be lifted until 14 days after the Judge signs the order.
Consider asking that the stay be annulled rather than terminated. If successful then the stay relief will relate back to the day the bankruptcy was filed (protecting any action by the creditor during that period).
Consider including a request for abandonment.
Relief from stay does not remove property from the bankruptcy estate. So you may want to include a motion for abandonment with your relief from stay motion. If you do you will need to notice all parties in interest.
Violation of stay
Actions taken in violation of the stay are either void or voidable.
In addition, a creditor proceeding in violation of the stay is subject to sanctions for contempt of the bankruptcy court. Further, an individual
injured by a willful violation of the stay “shall” recover actual damages, including attorney fees and costs, and may recover punitive damages. 11 USC 362
(k)(1). That said, debtors who fail to mitigate by informally asking a creditor to cure a stay violation may find the bankruptcy court unwilling to award any more than token relief.
Courts may award attorney fees under 362(k) even when there are no actual damages. In re Grine
, 439 B.R. 461, 471 (Bankr.N.D.Ohio 2010). An attorney fee award under 362(k) may include the cost of prosecuting the 362(k) claim. Id.