Monday, February 14, 2011

Motions for Relief from Stay and What They Mean for a Debtor


     Very often in bankruptcy cases Debtors are faced with a Motion for Relief from Stay filed by the creditor.  This article attempts to explain the effect of the motion and the burdens of proof required so that everyone, including myself, can understand.
     Upon the filing of any bankruptcy case the “automatic stay” goes into place.  The automatic stay precludes any action against the debtor or property of the debtor’s estate.  Normally secured creditors, such as car lenders or mortgage companies, are the first to file the Motion for Relief from Stay.  This motion normally is asking the court to remove the automatic stay as to the particular piece of property so that the creditor can proceed with its state court remedies against the property, like repossession or foreclosure.
     Upon the filing of the motion, in Chapter 13 and Chapter 11 cases, will set a hearing about 20 or so days out.  At the hearing the initial burden is on the Debtor to prove the particular piece of property is necessary for an effective reorganization.  This step is typically pretty easy if the property is used to make money, like a rental property, or is used by the Debtor in everyday life, like an automobile.  Once that burden is met the creditor must show a few things to get the stay lifted.  The creditor usually must first show there is little to no equity in the property, there has been a default in the original contract, and that the property is indeed not necessary for an effective reorganization.
     Typically if the Debtor meets the burden that the property is necessary for an effective reorganization the court will order some form of adequate protection payment to the creditor.  I will write an entire article on adequate protection later.  But at this point just understand that this is normally some form of cash payment to the creditor.
     If the Debtor intends on surrendering the property then they typically agree to let the stay be lifted so the creditor can foreclose/repossess the property and the Debtor is then done.  Below are two frequent examples.

Example 1:
Debtor files a Chapter 11 bankruptcy and owns a home and a vehicle.   A few weeks after filing the car lender files a Motion for Relief from Stay for the Debtor’s vehicle.  A hearing is set by the Court and the Debtor and creditor appear.  The Debtor first states that the vehicle is necessary because it gets them to and from work, work is obviously necessary for an effective reorganization!  The creditor then shows the court that there is a payment default and the vehicle is worth less than what is owed on it.  Typically the court will order adequate protection payments to start being paid to the creditor.  The exact payment and date will depend on the agreement or judge.  This ruling allows the Debtor to keep the vehicle but also protects the creditor against the depreciation in the collateral.

Example 2:
Debtor files a Chapter 11 bankruptcy and owns a home and a vehicle.   A few weeks after filing the home lender files a Motion for Relief from Stay for the home.  The Debtor no longer wants to stay in the home and does not want to make any more payments on the home.  Typically in this situation the Debtor, through counsel, files a consent to the motion and the stay is lifted.  This means the creditor can foreclose on the home in state court.  Do not be scared however because the Debtor will receive notices from the state court about the foreclosure.  They have to give you notice even though you are in bankruptcy in order to clear up the title.  However they cannot seek the deficiency balance once sold.
     Hopefully this will help you when you receive the motion in the mail from the court.  For more information go to chapter11jax.com or call me at 904-521-9868.  Your particular district may have different rules so make sure to contact a local experienced attorney.

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