Getting the Most Out of the Automatic Stay in a Chapter 11 Bankruptcy
When a bankruptcy petition is filed, an automatic stay immediately goes into effect, giving debtors a reprieve from most collection activities. This is in effect a court order that halts lawsuits, garnishments, and all forms of creditor harassment, allowing the debtor breathing room to reorganize their financial affairs. In a Chapter 11 case, the stay provides a structured environment for the debtor to propose a reorganization plan aimed at repaying creditors over time while maintaining operations.
The automatic stay allows the debtor to stabilize their finances without the pressure of immediate collection actions. This breathing space is essential for a business to continue its operations, retain employees and work towards profitability. To maximize the benefits of the stay, the debtor should promptly gather and organize financial records, maintain clear communication with creditors and work diligently on a feasible reorganization plan. It’s also vital for the debtor to stay current on post-petition obligations, such as taxes and lease payments, to prevent challenges from creditors.
The automatic stay in a Chapter 11 case lasts until the court confirms the reorganization plan, dismisses the case or converts it to another bankruptcy chapter. This process can take several months to more than a year, depending on the complexity of the case and the cooperation of the involved parties. Throughout this period, the stay shields the debtor from collection actions, giving them the opportunity to negotiate with creditors and propose a viable path forward.
In some circumstances, creditors can move to have the automatic stay lifted by demonstrating good cause to the bankruptcy court. For example, a secured creditor may argue for stay relief on the grounds that the collateral property doesn’t have enough equity to cover the loan and that the debtor is not making required payments. The debtor has the opportunity to submit evidence to the contrary, such as a competing assessment showing that the property’s equity value adequately protects the lender.
A creditor might also move for relief from the stay when the bankruptcy is alleged to have been filed in bad faith for the purpose of frustrating debt collection. The debtor may have filed multiple bankruptcies in a short period of time, allegedly just to take advantage of the automatic stay. However, the debtor can rebut the inference of bad faith by showing a genuine effort to seek reorganization of debts.
The burden of proof is on the creditor to persuade the court that the automatic stay should be lifted. The debtor is entitled to a full evidentiary hearing, which can take considerable time and resources. A skilled Chapter 11 attorney can respond effectively to relief from stay motions in order to protect property that is essential to the debtor’s reorganization plan.
The Law Offices of Michael Jay Berger is one of Southern California’s busiest bankruptcy law firms, with 12 locations in the region. If your business is financially distressed and needs relief from debt, contact us online or call 310-271-6223 to discuss your options.
