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Bankruptcy and the Powerful Automatic Stay

On Behalf of | May 31, 2013 | Firm News

Imagine you are a secured creditor trying to collect a debt from an uncooperative debtor. Because you are a secured creditor, your first instinct would probably be to foreclose on the collateral and sell it off. The debtor then files for bankruptcy. Once the debtor files the Petition for Bankruptcy, whether it is chapter 7, chapter 11, or chapter 13, an “automatic stay” immediately arises. This scenario is quite common, and secured creditors need to understand their rights once the automatic stay is in place.

Section 362(a) of the Bankruptcy Code is the automatic stay. This provision acts as a shield around the collateral of all secured creditors and judgment creditors. Creditors cannot move forward with any act to collect the debt or with foreclosure methods without violating the automatic stay. Secured creditors, however, may seek relief from the court to lift the automatic stay and reclaim their collateral. The provisions that allow you to lift the automatic stay are found in section 362(d)(1)-(2).

Section 362(d)(1) of the bankruptcy code allows relief from the automatic stay “for cause, including the lack of adequate protection of an interest in property…” Examples of adequate protection are given in section 361(1)-(3) of the bankruptcy and include: (1) “requiring the trustee to make a cash payment or periodic cash payments to such entity,” (2) “providing to such entity an additional or replacement lien,” or (3) granting such other relief such as making the debtor obtain insurance on the collateral.

If the creditor is not able to show lack of adequate protection, the creditor can utilize 362(d)(2)(A)-(B). This section allows relief on the automatic stay if the creditor can prove both (1) the debtor does not have equity in such property and (2) such property is not necessary to an effective reorganization. If the creditor can prove both elements then the creditor can have the automatic stay lifted and reclaim their property. If the secured creditor cannot win through either 362(d)(1) or section 362(d)(2) then the creditor will have to go through the process of bankruptcy and position themselves to obtain the most for their collateral.

If you or your company is in this position, with a debtor defaulting on their debts, and you believe they will try and file for bankruptcy, then you should consult an attorney and move quickly to foreclose on the collateral. If the debtor has already filed for bankruptcy, then you or your company should consult an attorney to either petition the court to have the automatic stay lifted for your collateral through section 362(d)(1)-(2).


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