12 Bankruptcy and the Automatic Stay

Question 1

What are creditors prohibited from, generally, when a debtor files for bankruptcy?

Answer 1

During a stay, a creditor may not (§362):
• Act to create, perfect, or enforce any lien against property of the estate, or against property of the debtor to secure a claim which arose before commencement
• Act to collect, assess, or recover a claim against the debtor that arose before the commencement
• Enforce a judgement obtained before commencement, or obtain of estate property

Question 2

(a) What happens if creditors willfully violate the automatic stay?
(b) What about innocent violations?

Answer 2

(a) Willful violation of the stay gives rise to damages (362(k)(1)):
• Actual damages
• Attorneys fees and costs
• Potentially punitive damages

(b) Innocent violations of the stay will be void or voidable

Question 3

(a) What can creditors do when their debtor files for bankruptcy?
(b) What might a secured creditor also do?

Answer 3

(a) Unsecured creditor’s only option is to file a proof of claim.

(b) A secured creditor may petition for a lift of the stay:
• A stay may be lifted:
o For cause, including a lack of adequate protection (generally collateral depreciation, or uninsured); OR
 To avoid a lift of stay and subsequent foreclosure, the debtor must compensate the creditor for any loss from depreciation
 Depreciation must actually threaten the interest, value must threaten to go below the amount of the secured debt
 Adequate protection, 3 approaches for starting point:
 Majority: Point when lift of stay motion is filed
 Minority (Craddock Terry): Filing of bankruptcy petition itself
 Minority: When the lift of stay motion is heard
o If (a) debtor has no equity in the collateral, AND (b) property is not necessary for effective reorganization.

Question 4

(a) Generally, when does the automatic stay end?
(b) How can the stay be lifted?
(c) What might the debtor do to convince the secured creditor not to lift the stay?

Answer 4

(a) When the case is discharged

(b) A stay may be lifted:
When SC motions to lift the stay-
1) For cause, including a lack of adequate protection (generally collateral depreciation, or uninsured); OR
2) When (a) debtor has no equity in the collateral, AND (b) property is not necessary for effective reorganization.

Question 5

(c) What are three approaches for determining the starting point for lifting of the automatic stay?

Answer 5

Adequate protection, 3 approaches for starting point:

 Majority: Point when lift of stay motion is filed
 Minority (Craddock Terry): Filing of bankruptcy petition itself
 Minority: When the lift of stay motion is heard