Protection from Creditors During Bankruptcy

In order to protect the consumer, creditors have been restricted from certain actions in the case of bankruptcy. Here are a few of them.

The Stay

One of the principal legal protections provided in a bankruptcy filing is the “stay,” or court enforced prevention of creditors from taking legal action against the bankrupt party. These stays are automatic, put in place at the time of filing. They expire when the debtor is discharged or when the case is closed. The length of time for these stays can vary from a few months, in the case of a Chapter 7 case, to the three-year period of reorganization provided for in a Chapter 13 case, to an indefinite period of time under the rules of a Chapter 11 case.

While this legal protection is temporary by statutory intent, it remains in place unless the creditor chooses to take action. Left alone, the stay remains in place. For this reason, it is standard procedure for creditors to seek relief from the stay in court, or to seek modification of the stay once the court grants bankruptcy. While many of these requests for modification are themselves a standard legal ploy with no energetic follow-through, occasionally a persistent creditor can become a real pest.

A Hearing

The creditor may request a hearing, which the court must conduct within 30 days or the stay is terminated with respect to the party requesting the hearing. The court does have the option of making a preliminary determination and holding a more elaborate hearing, which must be conducted within thirty days of the initial hearing. The court’s options to counter these time restraints are: an injunction suspending the hearing process for cause; a waiver of the thirty-day requirement; or a continuation ordered within the mandated thirty days. If none of these things occur, the stay is terminated.

There have been a number of cases that have proceeded to the appellate level and beyond, wherein creditors have successfully sought relief from the stay in situations where the appeals court felt that the debtor was not acting in good faith. In general, however, the statutory protection afforded debtors by the automatic stay and the necessary provisions for appeal by creditors have worked well as a tool for the courts. This structure for forcing continuing dialogue between creditor and debtor cannot be used to steamroller the bankrupt party after bankruptcy is granted, provided his filing is reasonable and he is conscientious about any requirements he is charged with.

Single Asset Real Estate

With the rise of “single asset real estate” (Chapter 11 cases brought about by overburdened homeowners), the mortgage company lobby pushed a law through Congress in 1994 that alters the automatic stay regarding these types of bankruptcy filings. The automatic stay terminates unless monthly mortgage payments begin again or a reorganization plan is filed with the court that has a reasonable expectation of success. It is widely believed, however, that this exception to the automatic stay may be stymied by litigation over the hastily drafted amendments. Raised as an ancillary point in this debate is the question of the debtor’s right to make counterclaims within the context of the same forum, giving rise to the specter of a renewed debate over the equity positions of both homeowner and mortgage company.

As with anything, there are exceptions to every rule. It’s important to make sure you know what your options are before the big companies attempt to take advantage of your naivety.