As a result of a bankruptcy filing, an automatic stay prohibits creditors from seeking to take certain actions outside the bankruptcy proceedings to collect amounts due to them from the debtor which arose prior to the filing of the bankruptcy petition. Notwithstanding, a creditor may be entitled to take certain legal action to obtain relief from automatic stay.
For example, if a creditor is a supplier who shipped products received by the debtor within forty-five (45) days prior to the bankruptcy filing, a creditor might submit a timely written reclamation demand to recover possession of goods, or at the debtor's option, receive a higher priority administrative claim as to the products when opposing an unsecured claimant, thus increasing payment.
Another example is for a creditor to file a motion with the court to obtain relief from automatic stay by explaining the asset as a depreciating asset that will lose its value if the court does not allow the creditor to take back the asset to resell. The Bankruptcy Code allows the court to grant relief from automatic stay for cause when there is lack of adequate protection of an interest in property, if a debtor does not have any equity in the property, or if the property is not necessary for an effective reorganization of debtor. This usually occurs in the event of assets like cars where a debtor is no longer able to pay loan payments towards the car purchase.
In a recent case decision, Dumont v. Ford Motor Credit Company, 581 F.3d 1104 (9th Cir. (Cal.) Sep. 15, 2009), the Ninth Circuit Court of Appeals confirms the Bankruptcy ode does not protect a debtor's personal property if the debtor fails to commit to redeem, reaffirm or assume the underlying loan. According to Bankruptcy Code Section 362(h)(1)(A), a debtor has to file a Statement of Intention and indicate whether debtor will surrender or retain the property. If the debtor retains, the debtor is required to elect to redeem, reaffirm or assume the underlying loan. Otherwise, the automatic stay is terminated and the vehicle is no longer property of the bankruptcy estate, allowing the creditor to attempt repossession of the vehicle.
When doing business, a company should be wary of customers' credit to prevent becoming a potential creditor of a bankrupt estate. A company should watch out for publications on bankruptcy filings to ensure that it timely files any claims and meets deadlines for relief from automatic stays.
When making a motion to the court, the creditor needs to be sure to comply with all local rules to give notice to the debtor of the hearing and copies of motion papers. Some judges rule against the creditor, sanction a party, or continue hearings, creating delays in return of an asset or relief from automatic stay, when local rules or the Bankruptcy Code are not followed. This illustrates the importance of engaging an experienced bankruptcy attorney to ensure proper protection of rights in bankruptcy proceedings.
