When to Request Relief from the Automatic Stay

Editors’ Note: this is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected] and we will try to answer it.

QUESTION:

How do I know if I should request relief from a debtor’s automatic stay?

ANSWER:

What is the Automatic Stay?

Section 362 of the Bankruptcy Code provides for the automatic stay. The automatic stay, triggered immediately upon the debtor’s filing of a bankruptcy petition, bars nearly all actions against the debtor and its property, including actions to exercise remedies concerning collateral, enforcement of prepetition judgments, and efforts to create, perfect, and enforce prepetition liens. The automatic stay does not prevent actions against the debtor that are based on post-petition causes of action, but it does apply to secured and unsecured creditors and to all the debtor’s property, wherever located. The automatic stay is limited by certain exceptions.

When Should You Request Relief from the Automatic Stay?

At the outset of a bankruptcy case, a secured creditor, a party to litigation in another court, or any other party potentially entitled to stay relief must decide whether to request relief from the automatic stay. Secured creditors are often the parties that request relief from the automatic stay to protect the value of their collateral. The factors to be considered in making this decision differ depending on the type of bankruptcy case and the type of stay relief. Furthermore, a secured creditor may conclude that the value of its collateral will be enhanced through the continued operation of a debtor’s business, whereas in the alternative, the creditor should promptly seek relief from the stay to preserve the value of its collateral. 

If a secured creditor concludes that the value of its collateral will be enhanced through the continued operation of a debtor’s business, the secured creditor should ask the court to provide adequate protection in the form of appropriate controls on the debtor’s use of its collateral; otherwise, the debtor has no duty to provide adequate protection of the secured creditor’s collateral. If a secured creditor decides to, instead, request relief from the stay, the secured creditor should be ready to explain to the court why the automatic stay would likely impair the secured creditor’s collateral.

Think Hard Before Requesting Relief

Requesting relief from the automatic stay often subjects a secured creditor’s lien to enhanced scrutiny from opposing parties. Before requesting relief from the automatic stay, a secured creditor should consider the likelihood that its lien may be subject to avoidance in bankruptcy or any other attack on its enforceability. If a secured creditor is concerned that its lien is unenforceable, the secured creditor may be better off waiting until the automatic stay is terminated and hoping that any challenges to its lien will go unnoticed. Essentially, a secured creditor in this context should balance the risk of losing its lien rights against the risk that the value of its collateral will decrease while the automatic stay is in effect.

[Editor’s Note: This article is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.

To learn more about this and related topics, you may want to attend the following webinar: The Nuts & Bolts of a Chapter 11 Plan and The Nuts & Bolts of a 363 Motion.]