Relief from Automatic Stay in a Chapter 11 Bankruptcy: Frequently Asked Questions
Stay relief refers to a party seeking relief from the stay injunction. The party seeking relief may be a creditor, litigant, contract counterparty.
What is stayed?An automatic stay provision takes effect when a debtor files for bankruptcy. That means most of the debtor's property, cash included, become part of the bankruptcy estate, under the control of the bankruptcy court. Section 362(a) of the Bankruptcy Code details this provision. The text applies to bankruptcy under any chapter.
The list that can be found at Section 362(a) shows that the actions of most concern to creditors are prohibited. They have to stop all attempts at collecting their debt unless the court allows them to proceed.
The scope of the stay is broad, for example, barring all measures to start or continue litigation, collect a debt, end contracts.
Creditors cannot enforce against the debtor pre-petition judgments. They cannot perfect or enforce liens granted pre-petition.
Also, the stay prohibits rights of setoff. But the automatic stay doesn't affect the right of recoupment.
The automatic stay does not apply to suits based on post-petition conduct.
What is excepted from the automatic stay?Certain debts and proceedings are too important to fall under the stay. In such situations, collections actions proceed as if the debtor hadn't filed for bankruptcy.
The actions that can continue are the ones related to divorce or parenting. For example, collecting child support. Tax proceedings and pension loans are also not stopped by the stay. Nor are criminal proceedings or actions to enforce regulatory powers.
How to seek relief from the automatic stayA creditor can seek relief from the stay by filing a motion under Section 362(d) - (g) of the Bankruptcy Code. This motion initiates a contested matter before the same court where the bankruptcy case is pending. The methods and grounds for obtaining relief only apply to the creditor that filed the motion.
If in the motion the creditor shows the grounds for why the relief should be granted, the relevant parties must be notified. The court will conduct a hearing if any of the parties request it.
The most common grounds for relief from the automatic stay are
o Relief from stay for cause, when the debtor has not been careful in accomplishing his duties in the bankruptcy case or has ignored to make the necessary payments or is using bankruptcy as a means to defer payment or foreclosure.
o Relief from stay for acts against property, when the debtor has no equity in the property or the property is not necessary for the debtor's reorganization.
If the debtor has a good chance of successfully reorganizing, relief will probably be denied. The court could, also, deny the relief from stay if the motion is filed too early in the reorganization plan and is not clear if the debtor will succeed or not.