When should a secured creditor seek relief from the automatic stay in a business bankruptcy?

An automatic stay pauses the efforts creditors make to collect on a debt. Filing for bankruptcy creates an estate that holds nearly all of the debtor’s assets and creates an automatic stay preventing creditors from taking most actions to collect. Creditors can’t continue their claims, enforce judgments, take estate property, or create, perfect or enforce liens. This is protection for debtors as well as creditors because the stay prevents creditors who might get an early jump on the courthouse from collecting a debt ahead of their priority. They can only get what the Bankruptcy Code allows them. Be careful. A creditor’s violation of the stay can allow debtors to seek damages. Violate the stay at your own risk. Creditors should stop as soon as they find out about a bankruptcy filing. A communication that looks like a threat or an attempt to collect after filing for bankruptcy might give the debtor grounds to seek damages.

Business cases are more complex than individual cases. Secured creditors can face their own unique challenges in a business case. Repeat filers can even lose automatic stay protection. A small business case is privately held and owes less than a set amount. If it’s a small business case and the debtor filed while a prior case was pending, or within two years of a plan’s confirmation or the case’s dismissal, 11 U.S.C. § 362(n) takes the stay away. If the stay doesn’t apply, secured creditors can take estate property.

The automatic stay isn’t a debtor’s permanent solution. In some cases the creditor can get the stay lifted and repossess the property. A court may lift the stay if a creditor shows cause, or if there’s no equity in the asset and the debtor doesn’t need it to reorganize.

Timing and Collateral Choice

Strategy is key, and a good strategy involves two things: timing and collateral choice. The motion works the same way in business cases as in consumer ones. The creditor’s strategy is different, though. When should you file a relief from stay motion? And should you target all the assets you’re owed, or just some?

The Creditor Decides When to Ask

Want to get past the stay? You’ll have to ask the court, but remember, the creditor decides when to ask. Creditors can file motions to lift the stay quickly. If they do, 30 days later it’s gone unless the court orders otherwise. Don’t assume it’s too early to file your motion. Even if the motion doesn’t work at first, it’s still useful. It may let you start procedures now that you’ll need for later, and it creates a record for showing cause down the road. Also, if relief is denied the creditor can ask for adequate protection, and the court may not grant it unless the creditor tried to lift the stay first. This is more common in business cases.

In business cases, operating businesses file Chapter 11 or Subchapter V reorganization cases. Subchapter V was created for small businesses to help them reorganize. At plan confirmation or dismissal the need for relief generally ends. If your debtors have confirmed a plan of reorganization, they’re on their way to discharge. Once a bankruptcy plan is confirmed, it becomes your contract. Both parties must follow it. But this new contract will affect your accounts and procedures. Go over it carefully, and update those parts of your system.

Sometimes the best strategy is waiting, especially if the creditor stands to get more through the bankruptcy process than through repossession. If the plan sets aside payments for you, you may get more later than you’d get by moving quickly. But don’t let debtors forget they owe you. You’ll have to weigh plan repayment against reclaiming your property. Relief and liquidation are costly, and if a plan makes you whole - or even partway there - then working with the debtor may give you more. You’ll need to talk to the debtor’s lawyer. Make yourself clear. Working with the debtor’s lawyer is often better than motioning to get what you’re owed. Sometimes you’ll have to move first, because debtors are stubborn. If your debtor ignores you and goes ahead with their own plans, filing a relief from stay motion can get their attention.

Pursuing Collateral

Choosing the right asset is as important as choosing the right time. Often creditors are only really interested in some assets. Each debtor’s case is different. Your strategy must take several things into account, including the business’s financial picture, the lender’s goal, and the collateral itself. You’ll have to weigh the pros and cons of pursuing collateral. Does the estate offer better prospects than taking the collateral back? It’s easier to claim your property in a Chapter 7 than a Chapter 11, so in a Chapter 7 it often pays to repossess it fast. But in a Chapter 11 case your inventory may gain value in process, and taking it now could cost more than holding out. If the collateral is inventory that hasn’t yet been processed or sold, and the debtor uses it, its value could grow. It’s a balancing act.

An estate doesn’t add value to all assets equally. Your best targets are assets with no equity and that the debtor doesn’t need to reorganize. That sounds vague. How do you know when something has no equity, and when the debtor doesn’t need it to reorganize? When the bankruptcy schedules say so, for one. If your debtor’s filed their schedules, look over them. Their answers may show no equity on the property you’re owed. But if the schedules don’t show enough, you’ll have to do something costly, such as hiring an appraiser or an expert. Your motion to lift the stay may hinge on proving no equity, and that burden is yours.

Relief from stay is a serious matter and not to be taken lightly, even if you’re the creditor. Moving too soon or too late can cost you. Targeting the wrong collateral may, too. Think it through, talk to your lawyer, and never take estate property without getting permission first.