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A Creditor’s Precautionary Motion about the Automatic Stay

February 26th, 2018 at 8:00 am

A creditor might file a motion to avoid violating the stay, or to get permission to take some action other than collect a debt.   


In the last three blog posts we’ve covered five reasons why creditors ask for “relief from the automatic stay.” The first one is by far is the most common.  Creditors ask for “relief from stay” to take back collateral, or to establish payment and other terms that you must meet to avoid losing the collateral.

The other four reasons were to get permission to finish a lawsuit or other proceeding to determine:

  1. whether you owe any debt to the creditor
  1. the amount of that debt, assuming you owe something
  2. whether you owe a debt which can be paid by insurance (instead of you personally)
  3. whether the debt you owe can be discharged (written off) in bankruptcy     

Today we cover two more reasons that a creditor may ask the bankruptcy court for “relief from stay.” These tend to be precautionary—arguably the creditor or other party could act without bankruptcy court permission. But because of the risks of potentially violating the automatic stay the party first asks for permission.

So, a party could file a motion for relief from stay

  1. to get a court determination whether the creditor’s intended actions would violate the automatic stay
  2. to get permission to take some other action against you not involving collecting a monetary obligation

Penalties for Violation of the Automatic Stay

When a creditor or other party learns that you’ve filed a bankruptcy case, it knows that it can no longer take collection action against you to collect any debt. If it does take such action it would likely be in violation of federal law and may have to pay damages.

The U.S. Bankruptcy Code (at Section 362(k)(1)) says that

an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

In other words there can be significant financial penalties for taking action against you in violation of the automatic stay.

1. Avoiding Violation of the Automatic Stay

The problem is that sometimes it’s not crystal clear whether a certain action by a creditor would violate the automatic stay or not. Bankruptcy Code Section 362 about the automatic stay has 8 subsections about the kinds of actions that bankruptcy stays (stops). It has 28 exceptions about the kinds of creditor actions that the automatic stay does not stop. The entire code section contains about 6,500 words—lots of potential for confusion.

So how does a creditor or other adversary of yours avoid the potentially serious penalties for violating the stay? It can file a precautionary motion for relief from stay to put the issue before the bankruptcy court. The creditor/adversary doesn’t act against you until after getting the court’s determination that it is acting legally.

For example, assume that you file a bankruptcy case while you are in the midst of a divorce. Your ex-spouse wants to finish the divorce proceeding regardless of your bankruptcy filing. The Bankruptcy Code says it’s not a violation of the automatic stay to finish a divorce proceeding. However it IS a violation to the extent that “such proceeding seeks to determine the division of property that is property of the estate.”  (Section 362(b)(2)(A)(iv).)

So your ex-spouse may file a precautionary motion to find out if the property to be divided is included in “property of the [bankruptcy] estate.” He or she wants to know how to go forward with the divorce without violating the automatic stay.

Note that you can simply not respond to such a motion if you’re fine with the action your adversary proposes. Then the bankruptcy judge will likely give the adversary the clarification it needed. If you don’t object your adversary will more likely get what it is requesting.

But if you do want to object, you respond through your bankruptcy lawyer to the creditor’s motion. The judge then decides whether the creditor’s proposed action would be a violation of the automatic stay. And if it would be a violation, the court usually also decides whether the adversary is still entitled to relief from stay to proceed with his or her action.

2. Permission to Take Action Other Than to Collect a Debt

Similarly, a creditor may ask for relief from stay to take some action separate from collecting its debt. It is essentially asking to take some action other than debt collection, and wants to be sure it can.

When you enter a contract with a creditor, you often have contractual obligations beyond just paying the debt. For example, if you’re behind on rent payments on an apartment when you file bankruptcy, you owe a debt. The landlord cannot pursue you on that debt because of your bankruptcy filing. But it may want to evict you so that it can rent it to another tenant. So the landlord could file a motion for relief from stay to get permission to evict you. That motion would make clear that the landlord is NOT asking for or getting permission to collect the back rent. It’s just asking for permission to proceed with an eviction-only lawsuit. If the landlord succeeded in that motion, the court’s order granting the permission would also be limited to the eviction proceeding, and would not allow collection of the back rent.

(There are special rules about the automatic stay involving residential rentals. So be sure to discuss this with your bankruptcy lawyer if it pertains to you. Also, see Section 362(b)(22 and 23) of the Bankruptcy Code and our recent blog posts about this.)


“Property of the Estate” Excludes Powers You Exercise for Another’s Benefit

May 26th, 2017 at 7:00 am

If you have a power of attorney over someone’s assets, or any similar power, those assets are not affected by your bankruptcy case.


“Property of the Estate”

Last time we emphasized that when you file a bankruptcy case everything you own becomes “property of the estate.” That’s what the bankruptcy trustee has jurisdiction over.

Once you know what property of yours the trustee has jurisdiction over, then you can see whether all that property all fits within your available “property exemptions.” Most of the time all of your “property of the estate” does fit within your exemptions. But the first step is knowing what’s included in the “property of the estate.”

Includes Just about Everything

Courts have consistently held that the scope of that term is very broad. “Property of the estate” includes “all legal and equitable interests of the debtor in property,” “wherever located and by whomever held.” See Section 541(a)(1) of the U.S. Bankruptcy Code.

This includes not just tangible property, things that can be touched or held. Property of the estate includes any intangible property—anything of value that’s not physical in nature. If someone owes you money, if you hold a patent or a copyright, or if you own corporate stocks or municipal bonds, these are all intangible property that would be property of your bankruptcy estate.

But There Are Exceptions

The Bankruptcy Code carves out some exceptions, certain narrow kinds of property that aren’t included as “property of the estate.” Examples include:

  • Funds withheld by or paid to your employer as contributions to an employee benefit, deferred compensation, annuity, or health insurance plan (Section 541(b)(7))
  • Property held in a spendthrift trust (Section 541(c)(2))
  • A commercial lease that terminated before the bankruptcy filing (Section 541(b)(2))
  • Funds in an educational individual retirement account (Section 541(b)(5))
  • A “power that the debtor may exercise solely for [another’s] benefit” (Section 541(b)(1))

Powers Exercised Solely for Another’s Benefit

Focusing on the last one of these, imagine a situation in which you controlled some property for someone else’s benefit. The most common example is probably a power of attorney for a relative, such as a parent. Through the power of attorney document, you do not own your elderly parent’s property; you just control it because the parent needs your help using that property on his or her behalf.

For bankruptcy purposes, even though you have legal control over the property it’s not treated as yours. As long as that power of attorney makes clear that the power can only be exercised on the other person’s behalf, the property included in the power of attorney would not be property of your bankruptcy estate

What would happen if instead that parent had given you all his or her property? Let’s say he or she trusted you to use that property to care for him or her. If that’s all there was to it, when you filed bankruptcy that gifted property would be treated as yours. It would become property of your bankruptcy estate. To whatever extent that property would not be protected by property exemptions, the Chapter 7 trustee would take and liquidate the property to pay your creditors. It would no longer be available to care for your parent.

This big distinction should make it clear that you’ve got to get the advice of a competent bankruptcy lawyer here. It may make sense for various personal reasons for a parent simply to gift property to a trustworthy adult child. But what may appear to make common sense could be disastrous for legal reasons. Get good advice in order to meet your goals.


The Practicalities of “Preferences”

April 12th, 2017 at 7:00 am

Preferences can be dangerous but can also present potential opportunities. So although not all that common, they’re worth knowing about.

A “Preference” in Bankruptcy

In our last blog post we explained what a “preference” is in bankruptcy. It’s what it sounds like it would be. It’s a payment you make to a creditor before filing bankruptcy in preference to your other creditors. Then, after you file your bankruptcy case, under certain circumstances your bankruptcy trustee has the power to require the creditor to return the money you paid.

However, that money is not returned to you but instead to your “bankruptcy estate.” That’s the term for the pool of all your assets as of the moment you file your bankruptcy case. To the extent those assets are not “exempt,” or protected, the trustee distributes those assets among your creditors. Any money returned by a creditor as a preference is part of that pool of potentially distributed assets.

We said last time that a preference can be good or bad for a person filing bankruptcy. We’ll get into both kinds starting with our next blog post. But first today we get into a couple important practicalities about preferences.

Putting Preferences into Perspective

It’s important to realize that most consumer bankruptcy cases do not involve any preference payments. Or at least do not involve the trustee making a creditor give back such payments.

There are at least 3 reasons for that.

First, there are timing conditions for a payment to a creditor to qualify as a preference. For most creditors the payment must be made within the 90-day period before the bankruptcy filing. Lots of people who file bankruptcy aren’t paying a lot to their creditors in the last few months before filing.

Second, bankruptcy trustees will usually not pursue a preference if the amount of payment(s) is relatively small. How small depends on the circumstances. Most consumer bankruptcy cases are “no-asset” ones—all of the debtor’s assets are exempt, protected.  If the trustee isn’t already getting other assets to distribute, the preference amount has to be surprisingly large to make the trustee’s time and expense worthwhile. Again, it depends on the circumstances. But usually it takes a thousand dollars or more in preference payment(s) if the trustee isn’t already pursuing other assets.

Third, even when the amount of the preference seems large enough, certain creditors may not be worth the trustee’s effort. The creditor may have gone out of business in the meantime, or may not have any meaningful assets. Especially if the trustee has to spend attorney fees to try to make the creditor pay and there’s a big risk it won’t, the trustee she may not be willing to try to chase down the preference. This is especially true if there are no other unprotected assets from which the trustee could pay its collection expenses.

Voluntary and Involuntary Preference Payments

As a debtor you can make a preferential payment either voluntarily or involuntarily. You could pay a creditor (before you file bankruptcy) by doing so voluntarily, intentionally. Or you could be made to pay involuntarily through a garnishment of wages or of a bank account, or some other aggressive method. Either kind of payment could be a preference, as long as all the other conditions apply.

If a payment was forced out of you, such as by garnishment, you’d welcome that payment being considered a preference. You may like the trustee making that aggressive creditor cough up that money. That would especially be true if the trustee turned around and paid that money where you’d prefer it to go.

If you paid a creditor voluntarily you may not care whether your trustee makes that creditor “return” the money. But if that creditor happens to be someone you have more than a debtor-creditor relationship with, you may really care. Having the trustee force your relative or friend to give up money you paid months ago could really hurt. It could hurt both your creditor relative/friend AND you.

In our next blog post we’ll get into these bad preferences, and how to stay clear of them.


“Pre-Petition” and “Post-Petition” Assets in Chapter 7

November 9th, 2016 at 8:00 am

Pre-petition assets are “property of the bankruptcy estate,” part of your Chapter 7 case. Post-petition assets are not.


Chapter 7 Timing

In our last blog we talked about the importance of the timing of your Chapter 7 “straight bankruptcy” case filing. We looked specifically at “pre-petition” vs. “post-petition” debts. Pre-petition debts are those that existed at time of your bankruptcy filing and so are included in the case. Post-petition debts did not exist until after filing and so are not included.

There is a similar distinction between your pre-petition and post-petition assets.

Pick a Point in Time

A Chapter 7 bankruptcy case is a financial snapshot in time. The bankruptcy system has to pick a specific time to look at your financial life, including your assets, your property. That point in time is the moment you file your case.  

“Property of the Estate”

That filing of your Chapter 7 case creates a bankruptcy “estate.” Think of this estate as a temporary legal person related to but separate from you. Everything you own at that point temporarily belongs to your bankruptcy estate.

So, pretty much everything you own pre-petition is “property of the estate.” Anything you earn or otherwise becomes yours after filing the case—post-petition—is not “property of the estate.”

You generally don’t actually lose possession of anything. The titles to your home or vehicle are not transferred. On the surface usually nothing changes. But legalistically your Chapter 7 trustee gains some potential control over your bankruptcy estate.

Exempt Property

In most Chapter 7 consumer cases the trustee never takes physical control over any of your assets. That’s because everything the debtor owns at the time of filing is “exempt”—protected from the trustee. That is, all of the property of the estate is exempt. It all fits within “exemptions”—categories of protected assets, and is all worth no more than the allowed dollar limits within each category.  

For example, you have a vehicle worth $10,000, with a debt of $7,500, and so equity of $2,500. Assume that in your state your vehicle exemption is $3,000. All of that equity is exempt, and so you can keep the vehicle; the trustee has no right to it. (Vehicle and other exemptions vary from state to state. And you’d need to keep paying the vehicle lender to satisfy its lien.)

“No Asset” Chapter 7 Case

If everything is exempt, then, usually about a month after you and your bankruptcy lawyer file your case, your Chapter 7 trustee will announce that he or she has no legal interest in anything in your bankruptcy estate. This usually (but not always) happens at the “meeting of creditors.” (A 5-10 minute meeting with the trustee you attend with your lawyer.) The trustee usually declares, verbally or in writing or both, that the case is a “no asset” case. This means that the bankruptcy estate contains no available assets because everything is protected by the available exemptions.

“Asset” Chapter 7 Case

If your bankruptcy estate contains something that isn’t covered by an exemption, the trustee has the right to take that from you. The trustee usually will, but may choose not to do so, depending on a number of factors. For example, something may cost too much to take possession of and sell compared to the anticipated proceeds.

Assuming the trustee does want a non-exempt asset, you’ll either surrender it to the trustee or have your lawyer negotiate term for you to keep the asset. You would pay the trustee for the right to keep it.

Again, non-exempt assets occur in a minority of cases. And if you’ve been upfront with your lawyer about everything you own, this will not be a surprise to you.

After the trustee takes and sells your non-exempt asset or in effect sells it to you, her or she then pays the proceeds to your creditors.  

Post-Petition Assets

Because post-petition assets are not in existence when you file your case, they are not property of your bankruptcy estate. The trustee has no control over or right to them.

Post-petition assets include a paycheck EARNED and received after your bankruptcy filing.  A paycheck earned BEFORE filing and not paid to you until afterwards is part of your bankruptcy estate. However, that paycheck may, as is often the case, be exempt and protected.

Post-petition assets also include gifts given to your after filing.

They include anything you purchase after filing, using money that’s either exempt or was earned post-petition.

Assets Received Post-Petition but Still Legally Pre-Petition

But careful about assets that you have a legal right to at the time of filing but do not get possession of until after filing. These are usually considered pre-petition assets and are included in your Chapter 7 case. Common examples include:

  • Tax refunds for tax years completed as of the time of filing, even if only paid to you later
  • Insurance proceeds for an accident or other incident that occurred before filing but only paid to you after filing
  • Litigation proceeds for a claim that existed pre-petition
  • Payment on a debt owed to you pre-petition but paid to you post-petition

Remember: such assets are property of your bankruptcy estate but often can be fully, or at least partly, protected through exemptions.


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