FUNDAMENTALS OF BANKRUPTCY FOR LENDERS
General Principles of Bankruptcy Law
3. AUTOMATIC STAY [§ 362]
a. The automatic stay is designed to give the debtor “breathing room” and to ensure orderly administration of the debtor’s assets.
b. Most attempts to collect, foreclose, repossess, sue or otherwise obtain property from or dunn the debtor are “stayed” or prohibited. The automatic stay is so called because it comes into existence (in most cases) immediately upon the filing of a voluntary bankruptcy petition.
c. The stay protects both the debtor and the estate.
d. Under current law, the stay automatically terminates as to the debtor upon discharge, or upon order of the Court. The automatic stay continues as to the estate’s interest in property until: (i) the property is abandoned by the Trustee, (ii) the Court lifts the stay, or (iii) the case is closed.
e. The Court has the authority to modify the automatic stay as to (i) the debtor, or (ii) property of the estate, upon request of a party in interest and after notice and an opportunity for a hearing.
f. The Court may modify the stay for cause, including:
(1) lack of adequate protection of an interest in property of the debtor; or
(2) when the debtor does not have equity in property and the property is not necessary for an effective reorganization.g. In an emergency, the Court can conduct a hearing on a Motion for Relief from Stay immediately.
h. Adequate protection [§ 361] requirements in the Code may be satisfied, as to collateral, if the Debtor has casualty insurance, an equity cushion, and/or is making regular payments.
i. In a case under Chapter 7, 11 or 13, where the debtor is an individual, the automatic stay shall terminate 60 days after filing of a Motion for Relief from Stay unless:
(1) The Court has rendered a final decision on the Motion for Relief during the 60-day period; or
(2) The 60-day period is extended by agreement of all parties, or by the Court for good cause shown.j. BAPACPA makes significant changes to the protection afforded to debtors by the automatic stay, particularly as to debtors who are “abusive” or “serial” filers.
(1) Statutory presumption of bad faith:
(a) A case is presumed to have been filed in bad faith if:
(i) more than one case under any chapter of the Bankruptcy Code has been filed by the debtor during the preceding 12 months; or
(ii) a previous case was dismissed in the preceding 12 months because the debtor failed to:
(iii) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of last case.
(b) The presumption of bad faith may be rebutted by the debtor. The debtor must show by clear and convincing evidence that the filing was made in good faith.
(2) 2nd case filed within 12 months
(a) If a debtor files a second bankruptcy petition within 12 months of a previously dismissed case, the automatic stay related to any property securing a debt, or any property securing a lease, shall terminate on the 30th day after the filing of the 2nd case.
(b) The debtor may make a motion to extend the stay as to any or all creditors; however, to have the stay extended, the debtor must prove (by clear and convincing evidence) that the filing was made in good faith.
(c) The hearing on the debtor’s motion to extend the stay must be completed prior to the expiration of the 30-day period provided in the statute.
(d) There is an exception to the termination of the stay if the previous case was a Chapter 7 proceeding that was dismissed as abusive under § 707 and the subsequent case is refiled as a Chapter 11 or 13.
(3) 3rd case filed within 12 months
(a) The automatic stay does not go into effect if the debtor files a 3rd case within 12 months of the dismissal of 2 or more previous cases (a previous Chapter 7 proceeding that was dismissed under § 707 and subsequently refiled as a Chapter 11 or 13 may not be included in the number of cases filed for this purpose).
Note: A literal reading of the statute indicates that unsecured creditors are not stayed by a third filing within a year. We caution all creditors to be careful in continuing to pursue a debtor who has filed a third petition within a year as the changes are such a radical departure from current law that some courts may be reluctant to apply them literally. We further urge caution because a dismissal of a case for failure to satisfy the means test followed by a refiling of a Chapter 13 will not count toward the three case limit and keeping track of the number and disposition of the cases may prove difficult.
(b) Upon request, the Court shall issue an Order confirming that no stay is in effect.
(c) The Debtor may make a motion to impose the stay, but must prove by clear and convincing evidence that the filing was made in good faith.
(d) Any motion made by the Debtor to impose the stay must be made within 30 days of the filing of the petition.
(e) If the Debtor’s motion is granted, the stay is effective as of the date of the Order, not the date of filing.
For additional information on any aspect of BAPCPA, please contact Spotts Fain attorneys, Robert H. Chappell, III or Jennifer J. West.
