The Automatic Stay: What Every Creditor Should Know
By Loral Narayanan, November 14, 2008
Note: The following article is vendor-submitted content which Credit Today has not written or endorsed but which we feel may be of value to our Members. Financially and economically, 2008 is not looking good - and U.S. corporate bankruptcies are no exception. By August, Chapter 7 and Chapter 11 filings by public companies had already exceeded the 2007 total for these filings. And 2nd Quarter business filings (Chapter 7, 11 & 13) for 2008 surpassed 2nd Quarter business filings for 2007 by 46%! To protect your company's position in the event a U.S. customer files for Chapter 7, 11, or 13 bankruptcy, it is imperative that you have a good understanding of the various sections of the U.S. Federal Bankruptcy Code (Title 11). This article provides insight into the responsibilities of the creditor in relation to an important protection - the Automatic Stay - that applies to a debtor upon filing bankruptcy (Title 11 Chapter 3 SubChapter IV Section 362). What is the Automatic Stay? The Automatic Stay is a statutory order that automatically stops ("stays") all collection actions against the debtor filing for bankruptcy protection. The Automatic Stay is a basic protection afforded U.S. debtors. In fact, the United States Senate has stated that: "The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy." Characteristics of the Automatic Stay -- It's purpose is to protect the debtor. It provides a period of time in which all judgments, collection activities, foreclosures and repossession of property are suspended and may not be pursued by creditors. -- It affords immediate relief. The Stay begins at the moment a voluntary or involuntary bankruptcy petition is filed. It automatically halts all collection efforts against the debtor. No specific order by a judge is required. -- It generally applies to everyone. All creditors (secured and unsecured) are precluded from efforts to collect pre-petition debts. The Stay does not, however, preclude a creditor from taking action against other entities, like co-debtors, co-guarantors or insurers, with the exception of Chapter 13 filings (see below). -- It must be taken seriously. Creditors are bound by the automatic stay even before they are aware of the bankruptcy filing. As long as the Stay is in effect, even the mailing of payment reminder letters must be discontinued. Violators of the Automatic Stay may be responsible for damages. -- It is temporary. The Automatic Stay terminates when the property is no longer property of the bankrupt estate, when the case is closed or dismissed, or a discharge is granted or denied. If a discharge is received, however, it acts as a permanent court order against future efforts to collect a discharged debt. Exceptions to the Automatic Stay -- §362(b) There are some statutory exceptions to the Automatic Stay. Certain actions are not "stayed", including:
- Criminal proceedings against the debtor
- Government proceedings to enforce its police or regulatory powers
- Actions by a lessor to obtain possession of nonresidential real property leased to a debtor under a terminated lease
- Proceedings relating to child or spousal support, or establishment of paternity
Relief from the Automatic Stay -- §362(d) A secured creditor may seek relief from the Automatic Stay by filing a written Motion for Relief. Such motions are common in Chapter 11 cases due to the typical delay between the filing of the Chapter 11 petition and the confirmation of the Chapter 11 plan. There are specific standards for relief of the Automatic Stay, which can be summarized as "for cause." This may mean that property is depreciating in value, or the creditor's interest in the property has not been adequately protected. Because the issues raised are usually quite urgent, the Bankruptcy Code provides that the bankruptcy court must hold a preliminary hearing on a Motion for Relief within 30 days after its filing, and then a final hearing must be commenced in another 30 days. Most bankruptcy courts have their own local rules as to the procedure to be adopted and followed in connection with Motions for Relief. Competent local counsel, aware of the variations in practice in the different bankruptcy districts, should be consulted. Automatic Stays under Bankruptcy Chapter 13 Chapter 13 of the Federal Bankruptcy Code contains a special Automatic Stay provision that protects co-debtors. Thus, if there is a co-debtor or guarantor on the debt with the Chapter 13 debtor, the creditor may not proceed against that party without first securing relief from the Automatic Stay in bankruptcy court. Automatic Stays and Setoffs Many businesses not only sell products or services to another company, they also buy products and services from that same company. If you do business with a customer or vendor, and you each end up owing the other money, you may have the right to "set off" the amount you owe against the amount the other company owes you. Making a setoff after a bankruptcy is filed is only allowed in narrow circumstances. Among other requirements, the debts have to be mutual between you and the actual debtor (not with one of its subsidiaries, for example), and they must have arisen before the bankruptcy was filed. In addition, Section 362 of the Bankruptcy Code prohibits the exercise of the right of setoff without obtaining a Motion for Relief from the Bankruptcy Court. Penalties for Violations of the Automatic Stay The Automatic Stay of the Bankruptcy Code has the same effect as a court-ordered injunction. Therefore, any violation is punishable as a contempt of court. The sanctions typically imposed for violation include damages and attorneys' fees incurred by the debtor due to the violation. Such sanctions can be imposed regardless of whether or not the party willfully disregarded the Automatic Stay. ***** Disclaimer: This information is provided by ABC-Amega Inc. for informational purposes only and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject. This information is provided by ABC-Amega Inc. Providing flexible, effective receivable management services focusing on improving DSO and cash flow for our clients. For information about ABC-Amega's receivable management solutions, contact info@abc-amega.com.
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