The filing of a bankruptcy petition under section 301 of Title 11 of the U.S. Code (commonly referred to as the Bankruptcy Code) commences a bankruptcy case for the party filing the petition, who is thereafter referred to as the Debtor(s). Once an individual or a business files a bankruptcy petition, as a creditor your rights become limited and it is important that you understand the steps you need to take to secure repayment of the owed debt.
Immediately upon commencement of the case, all creditors are prohibited from taking any action against the Debtor, including, among other things, bringing or continuing any court action against the Debtor in an attempt to recover a claim that arose before the commencement of the case. This is known as the “Automatic Stay.” Additionally, creditors are prevented (stayed) from taking possession of collateral or foreclosing on property of the Debtor that may secure a loan, even if the loan is in default and even if the Petition is filed one minute before the foreclosure sale.
A Debtor will often file a bankruptcy petition on the eve of, or just prior to a foreclosure sale in order to stop the sale from going forward. As long as the bank has notice of the filing of the Petition, it must cancel the sale or risk violating the automatic stay which violation can result in the payment of penalties and legal fees for the offender.
Other actions against the Debtor are prohibited by creditors including the attempt to create, perfect or enforce a lien against property of the Debtor or the setting off of a debt of the Debtor against funds on deposit. While there are a few exceptions to this Automatic Stay rule, most common creditors do not have the benefit of these exceptions. They are generally reserved for the US government, the State Government, the IRS and a spouse seeking domestic support from the Debtor.
There are several additional provisions that pre-empt the Automatic Stay to the benefit of a creditor, but they typically involve violations of a prior Bankruptcy Court order or when a Debtor has filed several cases in a short period of time. In one circumstance, the Automatic Stay is only active for thirty (30) days unless the Debtor receives approval from the Court after motion and hearing to extend the stay. In yet another circumstance, in the case where a Debtor has had two or more individual cases pending within the previous year that were dismissed, there is no Automatic Stay in effect on the filing of the third petition. Creditors are encouraged, however, to seek a Court ruling to this effect so they don’t run the risk of violating the stay.
Last, even though the Automatic Stay prevents the creditor from immediately continuing its action against the Debtor, the creditor may nonetheless file a motion in Court to terminate or condition the Automatic Stay. The Code provides that the Automatic Stay may be released for a creditor if it proves, for instance, that the Debtor “has no equity in the property” it seeks to protect and, the property “is not necessary for an effective reorganization.” This is the ground relied on by most creditor attorneys when seeking relief from the Automatic Stay. There are other grounds, including bad faith and a motivation by Debtor to frustrate the creditor’s actions. These are sometimes hard to prove, but all creditors who are stayed as a result of the filing of a Bankruptcy Petition are encouraged to speak with competent legal counsel to assess their options. – Gary M. Hogan.
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