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Bradley’s Bankruptcy Basics: The Automatic Suspension and the “Why” Behind the Warnings: What Happens After a Debtor Files For Bankruptcy? | Bradley Arant Boult Cummings LLP

Many creditors have been warned of the need to stop collection efforts once they are notified that a debtor has filed for choosing the right bankruptcy attorney. However, the “why” behind this warning, primarily the automatic suspension, is often misunderstood or ignored. Since automatic stay violations can have serious ramifications, it is essential that creditors know what automatic stay is, what it protects, and how to obtain a waiver from the stay so that the creditor can pursue their claims. collection efforts.

What is the automatic stay? What does it protect?

A debtor begins bankruptcy by filing a bankruptcy petition. This is the case whether or not the debtor files under Chapter 7, 11, 13 or any other chapter of the United States Bankruptcy Code. Under 11 USC § 362 et seq., The filing of the bankruptcy petition also triggers an automatic stay of all collection activities against the debtor and the debtor’s bankruptcy estate. Immediately after filing the bankruptcy petition, the debtor’s bankruptcy “estate” is formed.

The “estate” of bankruptcy includes virtually all of the debtor’s interests including, but not limited to, equipment, inventory, tangible property, cash, unpaid accounts receivable, unpaid contract balances, etc. . When in doubt, a creditor of a bankrupt the debtor must assume that the security on which the creditor claims interest is part of the debtor’s bankruptcy estate.

What should the creditor do after filing for bankruptcy?

Upon receipt of the notice of filing of the bankruptcy petition, the creditor is prohibited from taking steps to collect any debt owed by the debtor that arose before the filing of the case. In other words, until you can get advice from a bankruptcy advisor:

  • Stop contact: Automatic “robo” calls, standard collection calls, e-mails, letters, etc.
  • Stop collection efforts: Litigation, foreclosure proceedings, enforcement actions, etc.
  • Stop New contract: Renegotiation of contracts, refinancing, mortgage modifications, wage garnishment agreements, repayment plans, etc. A creditor must not, however, terminate a contract with a debtor because a debtor files for bankruptcy.

What can a creditor do to collect?

While the automatic stay protections are instantaneous, they are not undefined. By filing a petition for stay, a creditor can seek court permission to continue collection efforts against a debtor and in particular against an asset from the bankruptcy estate. For example, a mortgagee may seek relief to foreclose a property that is “under water”. Likewise, a lender can request relief to repossess an under-secured asset such as a vehicle. In each case, the creditor must demonstrate to the court that there is a “cause” to lift the automatic stay.

Please Click here for a visual outlining the stay process and the considerations creditors should consider when determining whether to file a stay application.

In deciding whether or not there is a “reason” for lifting the stay, courts will consider a number of factors, including:

  • If the warranty is properly insured;
  • If the debtor takes good care to keep the collateral;
  • If the debtor has not paid taxes on the collateral;
  • Whether the debtor makes interim payments on the collateral (i.e. adequate protection payments);
  • If there is equity in the collateral;
  • If the collateral is necessary for the debtor to reorganize (i.e. a mechanic who needs his garage mortgaged to repair cars and run his business);
  • If the value of the collateral decreases; and
  • If the debtor is the cause of an “undue delay” in the bankruptcy case.

If a debtor fails in one of these categories, a court can find a “ground” to lift the automatic stay. If the creditor’s request for a stay is granted, the creditor can then proceed to all recovery efforts vis-à-vis the guarantee which is no longer subject to automatic suspension. It is essential that the obligee only proceeds against this guarantee which is specifically listed in the request for compensation and the order granting it. If the creditor takes recovery action against other property of the estate or the debtor personally, the creditor can still be penalized for violation of the automatic stay.

Conversely, a court may dismiss a creditor’s request for a lifting of the automatic stay. If this is the case, the guarantee remains part of the bankruptcy estate and subject to the protections of the stay. This means no foreclosure, no litigation, no repossession, etc. It’s important to note that creditors can have more than a bite to eat. A creditor whose original claim was rejected may file another claim for reparation if, within months of the onset of bankruptcy, the debtor, for example, still fails to make payments, destroys the property, or maintains no insurance required.

In summary, creditors should heed the warnings given to them when it comes to dealing with bankrupt debtors. Indeed, it is better to ask a bankruptcy court for the lifting of the stay rather than the remission of violations of the stay. Why?