By: Henry Chuang, Esq.
Now that we have covered some basic bankruptcy terms in the prior two articles “Bankruptcy Basics, Part I” and “Bankruptcy Basics, Part II,” this article addresses the single most important motion for most creditors—the motion for relief from the automatic stay. The general rule is that when a debtor files for bankruptcy protection, the debtor is protected by the bankruptcy stay and creditors cannot pursue the debtor. In order to continue their litigation against the debtor, debt collection or foreclosure of debtor’s assets, lenders can move for relief from stay.
What is a motion for relief from the automatic stay? It is asking the bankruptcy court’s permission to continue collection against the debtor. If the creditor has persuaded the court that it is appropriate to lift the stay for collection to continue, the Court will issue an Order lifting the stay which will allow the creditor to continue to foreclose or otherwise pursue the creditor’s claim against the debtor. The hearing requires 14 days notice to the debtor.
Who should file a motion for relief from the automatic stay? It is most frequently sought by creditors who have liens on property (such as car loans and home loans) and the debtor has defaulted on the loan obligation and the creditor needs to repossess the asset or foreclose on the real property.
When do you file a motion for relief? Before filing for relief from stay, it is important to determine whether there is a stay in place. In certain circumstances, there is no stay upon debtor’s filing, or the stay is limited in duration. For example, when the debtor has filed for bankruptcy multiple times within a year the debtor is considered “abusive” and loses the automatic protection of the stay. (See this article for more on this. http://www.brewerfirm.com/articles/article-071009.html) If this is the second time the debtor has filed for bankruptcy protection in a year, then the automatic stay only lasts for 30 days. If this is the third time, then the automatic stay does not go into effect at all.
However, local rules differ on the interpretation of this bankruptcy statute that was enacted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and accordingly, some judges require a “comfort” order . This means the creditor still has to bring a noticed motion seeking an Order that there is no stay in effect. After you or your attorney has determined the stay is in effect (and it is always safest to assume there is a stay in place), then you must review the judge’s “local local” rule about when he or she will entertain the motion (usually there must be at least 1 if not 2 defaults, such as missed mortgage payments).
If there is an automatic stay in this bankruptcy, then filing a motion for relief from stay may be appropriate. In order for a creditor to prevail on the motion, the lender must be able to show either:
1) The debtor has no equity in the property and that it is not necessary for reorganization;
2) Good cause.
In the first path, if the property is over encumbered, this standard is relatively easy to meet. Given today’s real estate market and the number of people underwater, this is the basis that many lenders will seek relief on as there is rarely sufficient equity (or only a bare margin) in the property. Creditors are also required to show that the property is not necessary for reorganization—meaning that the debtor does not require that particular property in order to continue to earn a living.
In a Chapter 7 bankruptcy, this prong is not necessary for relief from stay as the debtor is not attempting to reorganize. However, in the context of Chapter 11 or 13 bankruptcies, this is usually also demonstrated by the fact that the property is underwater and that the borrower’s estate would be better off without the burden of making loan payments on an underwater asset.
When there is equity, filing a motion for relief “for good cause” is much more ambiguous. Unfortunately, the bankruptcy code does not provide a definition for “good cause,” so the courts have been making their own case-by-case determinations of what constitute good cause. So far, the courts have held that some factors to consider are whether the creditor’s interest is adequately protected by the equity in the property, whether payments after the filing of bankruptcy have been made, and the balancing of harm.
In a circumstance where there is an equity cushion and the debtor has some ability to make payments, it may not be possible for the creditor to have immediate relief and instead, the Court could order adequate protection payments.
At Brewer Offord & Pedersen LLP, we have had substantial experience in representing creditors in bankruptcy court. If you have questions regarding the collection of a judgment, we would be happy to help. We can be reached at (650) 327-2900 or on the web at www.brewerfirm.com.