Many creditors have been warned of the need to stop debt collection efforts as soon as they become aware that a debtor has filed for bankruptcy. However, the âwhyâ behind this warning, especially the automatic stay, is often misunderstood or ignored. Because automatic suspension violations can have serious consequences, it is important that creditors understand what automatic suspension is, what protects it, and how to be exempted from the suspension so that the creditor can proceed with the collection efforts.
What is the automatic stay? What does it protect?
A debtor files for bankruptcy by filing for bankruptcy. This is the case regardless of whether the debtor files under Chapter 7, 11, 13 or any other chapter of the United States Bankruptcy Act. According to 11 USC Â§ 362 ff. The filing of the insolvency application also triggers an automatic suspension of all collection activities against the debtor and the debtor’s bankruptcy estate. Immediately after filing the bankruptcy petition, the debtor’s bankruptcy âestateâ is created.
The bankruptcy “estate” encompasses virtually all of the debtor’s interests including, but not limited to, equipment, inventory, tangible property, cash, outstanding debts, unpaid contract balances, etc. When in doubt, a creditor of a bankruptcy debtor should assume that the collateral, in which the creditor asserts an interest are part of the debtor’s bankruptcy estate.
What should the creditor do when a bankruptcy petition has been filed?
After receiving notification of filing for bankruptcy, the obligee is prohibited from collecting the debtor’s claims that arose prior to filing the application. In other words, until you can get advice from a bankruptcy advisor:
End contact: Automatic “robo” calls, standard calls, emails, letters, etc.
Stop collecting efforts: Litigation, foreclosure proceedings, enforcement actions, etc.
Stop New Conclusion of contract: Contract renegotiation, refinancing, mortgage changes, wage garnishment agreements, disbursement plans, etc. A creditor should not, however, terminate a contract with a debtor because a debtor files for bankruptcy.
What can a believer do to collect?
The auto stay protections are instantaneous but not unlimited. By filing an application for suspension, a creditor can apply to the court for permission to pursue a debtor and in particular an asset in the bankruptcy estate. For example, a mortgagee can file foreclosure on property that is âunder waterâ. Likewise, a lender can apply for discharge to repossess an under-secured asset such as a vehicle. In any event, the obligee must prove to the court that the âcauseâ for lifting the automatic suspension exists.
You’re welcome click here Access to a visual representation of the deferral waiver process and considerations that creditors should consider when deciding whether to file an appeal waiver.
In deciding whether or not there is a “reason” for lifting the suspension, courts consider a number of factors, including:
Whether the collateral is properly insured;
Whether the debtor holds the collateral with reasonable care;
Whether the debtor has not paid tax on the collateral;
Whether the debtor makes interim payments on the security (ie, adequate security payments);
Whether the collateral includes equity;
Whether the collateral is needed for the debtor’s reorganization (i.e. a mechanic who needs his mortgaged garage to fix cars and run his business);
Whether the collateral is depreciating; and
Whether the debtor causes an âunreasonable delayâ in the insolvency proceedings.
If a debtor fails in any of these categories, a court can find a “reason” to lift the automatic stay. If the obligee’s request for suspension is granted, the obligee may undertake all collection efforts in relation to the securities that are no longer subject to automatic suspension. It is crucial that the obligee only takes action against the securities that are expressly listed in the application for remission and grant. If the obligee carries out collection proceedings against other estate or against the debtor personally, the obligee can still be punished for violating the automatic suspension.
Conversely, a court may deny a creditor’s request for an exemption from automatic suspension. In this case, the collateral remains part of the bankruptcy estate and is subject to the protection of the suspension. This means there will be no foreclosures, litigation, repossessions, etc. What is important is that believers can have more than one bite of the apple. A creditor whose application was initially denied can file another application for exemption if, for example, a few months after bankruptcy the debtor still fails to pay, destroys the property, or fails to maintain the required insurance.
In summary, it can be said that creditors should heed the warnings given to them when dealing with bankruptcy debtors. In fact, it is better to ask a bankruptcy court to lift the suspension than it is to seek forgiveness for violating the suspension.
Â© 2021 Bradley Arant Boult Cummings LLPNational Law Review, Volume XI, Number 348