DEBTOR'S GUIDE TO PREVENTING FORECLOSURE ON REAL ESTATE AND REPOSSESSION OF AUTOMOBILES UNDER THE BANKRUPTCY ACT

One of the most important weapons in the consumer bankruptcy arsenal is the automatic stay provision of the bankruptcy code. Few other legal steps that may be taken by a consumer can effectuate relief so simply, so effectively and so dramatically. The instant that a bankruptcy case is filed, the automatic stay takes effect, freezing almost all actions against the debtor and the debtor's property, including repossession or sale of the secured property including real estate.

The power of the automatic stay extends to a number of actions that may be taken against the debtor's secured property. For debtors who seek legal assistance just prior to some serious adverse action against their secured property, the automatic stay may provide the only practical solution. For others for whom all other legal steps have failed, the stay may provide at least temporary relief by postponing a crisis while more permanent relief is sought in the bankruptcy court.

It is sometimes necessary to file a bankruptcy immediately to take advantage of the automatic stay provision. A debtor can stop imminent harm, particularly the seizure or sale of secured property. The bankruptcy rules allow commencement of the case by filing a one page bankruptcy petition, and a list of debtor's creditors and their addresses.

PURPOSE OF AUTOMATIC STAY

The basic purpose of the automatic stay is to protect the debtor and the debtor's property. As stated in the House Report:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives a debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization, or simply to be relieved of the financial pressure that drove him into bankruptcy.

Functionally, the Stay also freezes the debtor's assets as of the date of the filing of the petition. In a straight Chapter 7 bankruptcy, this guarantees protection of the debtor's property, including any equity; the exempt property will provide the debtor with a fresh start, while the non-exempt property can be distributed fairly to creditors. In Chapter 13 plans, the stay insures protection of exempt property necessary for success of the plan as well as the debtor's fresh start.

The stay allows the bankruptcy court to deal with the debtor's situation in an orderly manner. It prevents, at least until the bankruptcy court allows otherwise, other parties and courts from interfering with or complicating the bankruptcy process.

THE DURATION OF THE AUTOMATIC STAY

Depending on the circumstances, the duration of the automatic stay varies significantly. If the circumstances require, a stay can be ended by the court almost immediately, although such immediate relief is very unusual in consumer bankruptcy cases. As a practical matter, the stay is usually not lifted in less than thirty days after the petition has been filed. Indeed, the stay may last for the duration of the case, three to six months in straight Chapter 7 cases, and up to five years in Chapter 13 cases.

ENFORCEMENT OF THE AUTOMATIC STAY

A knowing violation of the automatic stay can constitute contempt of court. As with court ordered injunction, a party must have actual and adequate notice of the order before it may be held in contempt. A telephone call to the creditor or its counsel provides such notice, but problems of proof could arise when the notice is not in writing.

USE OF "CRAMDOWN" IN CHAPTER 13 CASES

A Chapter 13 plan may give the consumer the greatest power to affect the rights of secured creditors since the debtors plan may "modify the rights of the holders of secured claims".

Most of the debtor's flexibility under Chapter 13 comes from this broad right to modify the rights of secured creditors. In bankruptcy parlance, this right to limit the enforceability or change the terms of the creditor's contract over the creditor's objection is called a "cramdown".

The bankruptcy code does not define the term "modify". Therefore it may presumably be given its broadest possible meaning forward. Any term of the contract may be subject to change. The debtor might propose to pay a lower total amount than originally agreed, lower the amount of the installment payments, pay over a longer period of time, defer payments until after other debts are paid, eliminate various oppressive terms, or even totally eliminate the creditor's liens in some cases.

One limitation of the rights of Chapter 13 Debtors to deal with secured creditors is that the adequate protection must be given to the creditors having liens on property, used, sold, or leased by a debtor at least until a plan is confirmed, it is clear that the creditor may request relief from the automatic stay if adequate protection has not been provided. It is less clear whether this right to relief continues after a plan is confirmed, as the provision of the confirmed plan bind each creditor.

There are other provisions of the bankruptcy code which can protect a debtor from foreclosure on a house or a repossession of a car which are not discussed here. However, it is clear, that if necessary, a debtor can file a petition in bankruptcy to avoid, at least temporarily, the loss of a house or a car that has been used as collateral for a loan.