In the course of doing business, you may extend credit to someone else. You held up your end of the contract, but the other party failed to pay the money owed to you. You probably attempted to collect the debt without success.
Then, the action you might fear happens, and the other party files for bankruptcy. You receive notice of the bankruptcy along with a warning from the court that an automatic stay is in place barring you from any further collection efforts. If you wonder whether you must remain bound by the automatic stay, the answer is maybe not. As a creditor, you have rights.
Exercising your rights as a creditor in bankruptcy
The U.S. Bankruptcy Code does provide a way for creditors such as you to continue collection efforts. You must file a motion with the court to lift the automatic stay for your limited purpose. Once you file the motion and all relevant parties receive notification of it, the court schedules a hearing during which you must plead your case. Many grounds for lifting the automatic stay exist, but most fall under the following categories:
- For cause: The U.S. Bankruptcy codes specifically outline only “adequate protection of the property” as cause to lift the stay. However, many bankruptcy courts have allowed creditors to continue collection efforts for the following actions of the debtor:
- Using bankruptcy to avoid payment
- Using bankruptcy to avoid foreclosure
- Failure to carry out required duties in bankruptcy
- Failure to make required payments in bankruptcy
You are only required to provide presumptive evidence to the court that proves your cause. The debtor, and possibly the trustee, must rebut your evidence.
- For acts against the property: If a Chapter 7 debtor has no equity in the property you hold a lien for, the court may lift the stay. If a debtor filing under another chapter has equity in the property, you must show that the debtor does not need the property to successfully emerge from bankruptcy.
Again, the debtor or trustee must provide evidence to the contrary in either circumstance to keep the stay from being lifted.
Types of relief available to you
Bankruptcy law outlines four forms of relief when it comes to the automatic stay:
- Conditioning: In order for the stay to remain in place, the debtor and/or the trustee must take measures to protect the property. For example, if the value of the property in question is in jeopardy, the court may keep the stay in place only if the debtor or trustee meets certain conditions.
- Termination: The court lifts the stay, and you may recommence collection efforts. You must be careful not to violate the stay by taking any action prior to the entry of an order.
- Modification: The court modifies the stay to allow you to proceed with some collection efforts but not others. For instance, you may proceed with a lawsuit and receive a judgment, but you may not collect on that judgment until the bankruptcy concludes.
- Annulment: If you prove bad faith on the part of the debtor, the court could enter an order that acts as if the stay never existed. This means that any actions you took in good faith that technically violated the stay don’t affect you. You may proceed with your collection efforts as if the debtor never filed bankruptcy.
Obviously, the unique circumstances between you and your debtor dictate which type of order the court enters. The type and strength of your evidence that the court should lift the stay could profoundly affect which direction the court goes.
The U.S. Bankruptcy Code can be a challenge to understand. You may only get one shot at having the stay lifted, and you don’t want to make a mistake. Having an ally and advocate in a Nevada attorney could prove invaluable in getting the relief you need.