Relief from Automatic Stay

When a debtor files for bankruptcy, most of the debtor's property, including cash, become part of the bankruptcy estate that is subject to the control of the bankruptcy court, so most creditors must stop all attempts at collecting their debt unless they get specific permission from the court to proceed. Sections 362(d) – (g) of the Bankruptcy Code provides creditors with various methods and grounds for obtaining a relief from this automatic stay, but only applies to the creditor that filed a motion for it and only for the activity described in the motion.

To obtain relief, the creditor must file a motion to request relief, which is usually done soon after the debtor files for bankruptcy. If grounds are shown for why the creditor should be granted a relief from stay, then notice must be sent to the relevant parties. If any of the parties requests it, then a hearing must be conducted.

Forms of Relief — Termination, Annulment, Modification, and Conditioning

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There are 4 different types of relief from stay: termination, annulment, modification, and conditioning. The form chosen by the court is the one most appropriate based on the grounds for relief.

Termination of the stay ends the stay so that the creditor can proceed in enforcing its claim. However, the termination of the stay is effective only when the order is given; it does not validate any previous actions by the creditor in violation of the stay that was in effect.

Annulment treats the stay as if it had never existed. Therefore, even actions in violation of the stay previous to the annulment order are vindicated. Annulment is an extraordinary remedy that is only given when the debtor has shown bad faith, and that the creditor seeking annulment had acted in good faith in its previous actions and not in willful violation of the stay.

Modification of the stay alters the stay so that the creditor can proceed on some actions, but not others. For instance, if the creditor is involved in a court case seeking judgment for its claim, then the modification may allow the creditor to obtain the judgment, but not to allow the collection of the judgment. A creditor may want to do this to have the judgment so that it can proceed if the bankruptcy case is dismissed or if the debt is not discharged.

Conditioning of the stay stipulates conditions that must be satisfied by either the debtor or the trustee to keep the stay alive. For instance, if a creditor moves for relief from stay because its property is losing value, then the court may condition the relief by stipulating that relief will be granted unless the debtor or trustee takes actions to protect the value of the property.

Grounds for Relief

There are several grounds for relief from the automatic stay. The most common grounds are for cause or because the debtor has no equity in the property, or it is not necessary for the debtor's reorganization in a rehabilitative bankruptcy (Chapter 11, 12, or 13).

The relief from stay for cause is the most general grounds for asking for relief, and can be used both against the debtor and against his property. Only 1 example is given in the Bankruptcy Code, which is to provide adequate protection for property. However, the courts have granted relief from stay for cause because the debtor has not been diligent in carrying out his duties in the bankruptcy case or has failed to make required payments or is using bankruptcy as a means to delay payment or foreclosure.

Providing a rebuttal for relief for cause devolves upon the opposing party, which is either the debtor or the trustee. The applicant for cause needs only to state the cause and offer prima facie evidence for its grounds. The opposing party must then provide evidence to rebut the granting of relief. §362(g)

Relief from stay for acts against property is given if the debtor has no equity in the property and because it is not necessary for his reorganization. The 2nd condition only needs to be satisfied if there is equity in the property and if it is not a Chapter 7 bankruptcy, since there is no reorganization in a liquidation. With this ground for relief, the creditor must prove that the debtor has no equity in the property, but either the debtor or the trustee will have to prove all other issues to rebut the relief request.

In determining whether there is unencumbered equity, the value of all liens and the debtor's applied exemptions must be subtracted from the value of the property. Property value is usually determined by expert testimony. Whether the fair market value or the foreclosure value is used will depend on how the property can be realistically sold.

Without including any security interest or lien held by the creditor seeking relief from stay, unencumbered equity can be determined by the following equation:

Unencumbered Equity = Fair Market Value - Payoff Amount of Loans Secured by Property - Amount of All Remaining Liens - Cost of Sale

If there is equity in the property and it is not a Chapter 7 bankruptcy, then it must be determined if it is necessary for the debtor's reorganization under a Chapter 11, 12, or 13 plan. Although there has been some dispute as to whether this requirement applies only to Chapter 11, which is specifically titled "Reorganization" in the Bankruptcy Code, while Chapter 12 and 13 use the phrase "Adjustments of Debts" in their title, it has generally been recognized by the courts that it applies to all chapters involving a reorganization, especially since all cases of Chapter 12 and many cases of Chapter 13 involve a business where the business needs specific equipment or other property in order to continue doing business and to earn income to pay for the distribution plan. Property for the conduct of the debtor's business is the most common and obvious reason why property would be necessary for a reorganization.

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A major consideration in whether to grant relief for property is whether the debtor can successfully reorganize. If the debtor has a good chance of succeeding, then relief will probably be denied. Relief will also probably be denied if the applicant for relief files the motion too early in the reorganization plan, before it becomes clearly evident whether the debtor will succeed or not.

There are 2 other specialized cases involving real estate that are grounds for a relief from stay. In both of these cases, the bankruptcy process is being used by the debtor as a means to delay or prevent foreclosure on real estate.

Single asset real estate cases involves debtors that own only a single piece of real estate used to produce income, and from which, the mortgage was paid. But during market downturns, many of these debtors can no longer make the mortgage payments, especially since these often involved commercial properties with hefty monthly payments. To continue their business, they would file Chapter 11 to prevent foreclosure, but the debtors had little chance of improving their business until the economy improved. Hence, the mortgagees argued that the debtors had no viable plan to reorganize and were using the stay as a means of preventing foreclosure until the economy improved. Although many of the mortgagees had the stay lifted for cause, Congress decided to add a special section, §362(d)(3), in 1994 to specifically deal with this form of abuse.

However, the debtor may be able to overcome relief from stay if he submits, within 90 days of the order for relief from stay or some other short time as determined by the court, a reorganization plan that has a reasonable chance of confirmation and success, or if the debtor at least makes monthly interest payments to all creditors that have a lien on the property.

Another form of abuse involves a debtor and his agents who would file successive bankruptcies, with each filer claiming an interest in the property to prevent the mortgagee from foreclosing. Consequently, included in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was §362(d)(4), which provided an in rem relief from stay that was attached to the property. If the relief from stay is recorded in compliance with applicable state laws governing notices of interests or liens in real property, then the order shall be binding in any other bankruptcy case claiming an interest in the property for up to 2 years after the granting of relief.

A debtor in a subsequent case may file a motion with the court to remove the in rem relief from stay only if he can convince the court that there is justification because of changed circumstances or for good cause.