The Automatic Stay in Bankruptcy: How Long Is it Effective?
Modifyiing the Automatic Stay
The automatic stay may be modified upon motion filed with the bankruptcy court. There are specific standards for the modification of the stay, but it can be simply summarized as "for cause." This may mean that property is depreciating in value, adequate protection has not been given to a creditor, an insurance policy or indemnity may also be liable on the claim, or a host of other reasons.
Because issues raised are usually quite urgent, the Bankruptcy Code provides that the bankruptcy court must hold a preliminary hearing on an automatic stay motion within 30 days after its filing, and then a final hearing must be commenced in another 30 days. If these hearings are not held or if the court does not extend the period of time, the automatic stay is deemed to have been terminated.
Most bankruptcy courts have their own local rules as to the procedure to be adopted and followed in connection with motions to modify the automatic stay. Competent local counsel should be consulted who will be aware of the variations in practice in the different bankruptcy districts.
The Effect on Setoff
Credit grantors have been perplexed as to whether they may offset credit balances or other contra accounts, with monies owed by the debtor, once a bankruptcy is filed. The Bankruptcy Code creates an interesting situation in this area. The law says that the right of setoff will not be affected by the Bankruptcy Code. This means that a creditor that has the right to effect a setoff will continue to have that right. However, Section 362 of the Bankruptcy Code states that the automatic stay prohibits the exercise of the right of setoff without having the stay modified. Thus, credit executives must be extremely careful not to violate the automatic stay by effecting contra accounts where credit balances or credits for allowances or reserves may exist.
Securing a modification of the automatic stay to effect the setoff is not usually very difficult, but must be done to avoid potential penalties for violating the stay.
Stays in Chapter 13
With the increase in the debt limits for the filings of Chapter 13 and the use of Chapter 13 by individual business entrepreneurs and guarantors, business credit executives are being confronted with Chapter 13 cases in an ever-increasing number.
In Chapter 13, the normal provisions of Section 362 apply--there is a stay against any action against a debtor or the debtor's property. However, Section 1301 (only applicable in Chapter 13) also provides for a co-debtor stay. Thus, if there is a co-obligor or guarantor on the debt with the Chapter 13 debtor, the creditor may not proceed against the guaranty or third-party obligation without securing release from the automatic stay in the bankruptcy court. This is a situation that causes many accidental violations of the automatic stay by business credit grantors as they proceed against guaranties that have joint obligors.
Duration of the Stay
Unless modified by the bankruptcy court, the duration of the automatic stay is controlled by the Bankruptcy Code in Section 362. In Chapter 7 cases involving individuals, the stay remains in effect until the earlier to occur of the case being closed/dismissed or a discharge is granted or denied. Additionally, in the Chapter 7 scenario, if the stay involves an action against property of the debtor's estate, the stay remains in effect so long as the asset is being administered by the estate. With respect to partnerships and corporations in Chapter 7, the stay remains in effect so long as the case has not been closed or if the property is still being administered.
In Chapters 11 and 12, the stay remains in effect until the earlier to occur of the confirmation of a plan or the dismissal of the case.
In Chapter 13, the stay remains in effect until the plan has been confirmed or the case has been closed or converted. Additionally, with respect to the co-debtor's stay, even if a plan is confirmed, the co-debtor's stay remains in effect permitting the creditor to only look to the co-debtor for such amounts as will not be collected under the plan if it is fully performed. Thus, if a Chapter 13 plan provides for a 55 percent distribution to creditors over three years, an action may not be brought against the guarantor for more than 45 percent of the debt.
Discontinuance of Collection Activities
The automatic stay is effective throughout the United States and a creditor is bound even if it is unaware of the pendency of the bankruptcy case. In addition to staying any litigation, it should be remembered that all collection activity, including the mailing of reminder statements, must be discontinued immediately. The bankruptcy courts have substantial contempt power, and the bankruptcy judges are required to use that power in order to maintain and enforce the jurisdiction of the bankruptcy court.
The concept of the automatic stay is not a difficult one, but it has very little latitude or flexibility built into the law. As such, it is important that all credit grantors be reminded of the very wide parameters of the automatic stay so as to not run into trouble for either the accidental or intentional violation of this critical provision of the Bankruptcy Code.
Charles M. Talelbaum is a partner in the Florida law firm of Cummings & Lockwood, specializing in the areas of bankruptcy and creditors' rights and currently acts as NACM'S general counsel.
|Printer friendly Cite/link Email Feedback|
|Author:||TATELBAUM, CHARLES M.|
|Article Type:||Brief Article|
|Date:||Feb 1, 2000|
|Previous Article:||Mechanic's Liens in Minnesota.|
|Next Article:||Bankruptcy Reform Legislation: Congress Moves Slowly.|