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WHAT IS THE AUTOMATIC STAY IN
BANKRUPTCY?
The automatic stay provides a period of timein
which all judgments, collection activities, foreclosures, and
repossessions of property are suspended and may not be pursued by the
creditors on any debt or claim that arose before the filing of the
bankruptcy petition. As with cases under other chapters of the
Bankruptcy Code, a stay of creditor actions against the chapter 11
debtor automatically goes into effect
when the bankruptcy petition is filed. 11 U.S.C. § 362(a). The filing of
a petition, however, does not operate as a stay for certain types of
actions listed under 11 U.S.C. § 362(b). The stay provides a breathing
spell for the debtor, during which negotiations can take place to try to
resolve the difficulties in the debtor’s financial situation. Under
specific circumstances, the secured creditor can obtain an order from
the court granting relief from the automatic stay. For example, when the
debtor has no equity in the property and the property is not necessary
for an effective reorganization, the secured creditor can seek an order
of the court lifting the stay to permit the creditor to foreclose on the
property, sell it, and apply the proceeds to the debt. 11 U.S.C. §
362(d).
CHANGES TO THE AUTOMATIC STAY
UNDER THE NEW BANKRUPTCY LAW
• S. 256 § 302; serial filings
A new § 362(c)(3) provides that if a
Chapter 7 , 11, or
Chapter 13 case is filed within one year of the
dismissal of an earlier case (other than a Chapter 11 or 13 case filed
after a § 707(b) dismissal), the automatic stay in the second case
terminates 30 days after the filing, unless a party in interest
demonstrates that the second case was filed in good faith with respect
to the creditor sought to be stayed. And if a second repeat filing takes
place within the one-year period, the automatic stay will not go into
effect (and the court is required promptly to enter an order confirming
the inapplicability of the stay on request of a party in interest).
However, a party in interest may obtain imposition of the stay by
demonstrating that the third filing is in good faith with respect to the
creditor sought to be stayed. For both second and third filings within
one year, circumstances are described which generate a presumption that
the new filing was not made in good faith, and such a presumption would
be required to be rebutted by clear and convincing evidence.
Under a new § 362(i), this presumption would not arise
in “any subsequent case” if a debtor’s case is dismissed “due to the
creation of a debt repayment plan.”
• S. 256 § 303; in rem relief; ineligible debtors “In
rem” relief from the automatic stay is authorized by a new § 362(d)(4).
In cases involving either (A) transfers of real property collateral
without the consent of the secured creditor or court approval or (B)
multiple bankruptcy filings involving the same real property, the court
may issue an order of relief from the automatic stay, which order,
properly recorded, is binding on all owners of the property for two
years from the date of entry. A party in interest may file a request for
imposition of the stay within 30 days of a subsequent case filing, and
the court may impose the stay only if the party demonstrates that the
case was filed in good faith as to the creditors sought to be stayed.
Where in rem relief is effective, new § 362(b)(20) creates an exception
to the automatic stay for lien enforcement activity in later cases.
A new § 362(b)(21) excepts from the stay any act to
enforce a lien or security interest in real property if the debtor was
ineligible under § 109(g) or filed the case in violation of an order
“prohibiting the debtor from being a debtor” in another case under Title
11.
• S. 256 § 311; exception for leased residential
real estate Two new exceptions from the automatic stay are established
for landlords seeking to evict tenants. The first, § 362(b)(22), allows
the continuance of any eviction proceeding in which the landlord
obtained a judgment of possession prior to the filing of the bankruptcy
petition. The second, § 362(b)(23), deals with evictions based on
“endangerment” of the rented property or “illegal use of controlled
substances” on the property. Paragraph (b)(23) excepts the eviction
proceeding from the stay if (a) it was commenced before the filing of
the bankruptcy case, or (b) if the endangerment or illegal use occurred
within the 30 days before the bankruptcy filing. In either situation,
the landlord would be required to file with the court and serve on the
debtor a certificate setting out the facts giving rise to the exception.
New provisions in § 362(l)-(m) allow a debtor to contest
the applicability of both of these new exceptions by filing timely
certifications under penalty of perjury. As to the (b)(22) lease
exception, the debtor would be able under § 362(l) both to keep the stay
in effect for an initial 30 days after the bankruptcy filing—by
certifying that applicable non-bankruptcy law allowed the lease to
remain in effect upon the debtor’s cure of the default that was the
basis of the eviction order—and to keep the stay in effect after 30 days
by filing a further certification that the cure amount had been paid
within the initial 30 days. As to (b)(23), a new § 362(m) provides that
if the debtor files a certificate denying the assertions in the
landlord’s certificate, the court is required to conduct a hearing
within 10 days “to determine if the situation giving rise to the
lessor’s certification . . . existed or has been remedied.”
• S. 256 § 315(a); notice to creditors Section
342(c) is amended to remove the provision that a failure by the debtor
to supply notice to creditors in the prescribed form does not invalidate
the notice. Instead, a new § 342(g) provides that no monetary penalty
may be imposed on a creditor for violating the automatic stay or for
failing to turn over property, unless notice is given in a form
effective under amended § 342. As amended by new provisions in (c)(2),
(e), and (f), § 342 now provides that notice to a creditor will not be
effective unless it is served at an address filed by the creditor with
the court or at an address stated in two communications from the
creditor to the debtor within 90 days of the filing of the bankruptcy
case (or between 90 and 180 days if the creditor was prohibited from
communicating with the debtor during the more recent 90-day period). To
be effective, the notice must also include the account number used by
the creditor in the two relevant communications. An otherwise
ineffective notice will only subject the creditor to liability if the
notice was “brought to the attention of the creditor,” which is defined
as receipt by a person designated by the creditor to receive bankruptcy
notices.
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