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Filing a Bankruptcy To Sell Your House Not a Great Idea. The Automatic Stay Ain't What It Used To Be.

By Joseph McDaniel, Esq.

It used to be, in the good old days, formerly known as these trying times, that the automatic stay at 11 USC 362 would hold off a secured creditor forever. Well, a long time, anyway. Creditors then were less certain of their remedies, and Judges were less certain of the law, and debtor's attorneys were frisky.

The automatic stay is a fundamental protection for both the consumer debtor and the business debtor. But one of the primary purposes of the automatic stay is to protect the bankruptcy estate itself from the depredations of the "race of diligence" that occurs prior to a bankruptcy filing.

Remember, outside of bankruptcy, the general rule among creditors of the same class is that "he who strikes furstest gets the mostest." An unsecured creditor who obtains a judgment and garnishes obtains a continuing garnishment and additional rights, including the right to hold a debtor's exam of the judgment debtor, and ask him (or her, or them) where they have what. And that examination is held, as many are, under penalty of perjury, and is recorded, and is no fun for the debtor.

The filing of a Chapter 7 Bankruptcy in Arizona changes the playing field from a "furstest gets the mostest" to an "After you, my dear Alphonse!" sort of environment.

Most creditors, after a bankruptcy filing, know that efforts in other Courts are of no particular benefit to them. Some creditor lawyers are new kids who don't realize that the automatic stay is effective as to their efforts even if they haven't received a copy of the stay, and that their efforts in another court, like Superior Court, or Justice Court, are void ab initio.

That is, they should have stayed home reading the funnies and drinking coffee and blogging instead of trying to move forward in a lawsuit against a debtor after a bankruptcy is filed.

Silly creditor! 

So for most creditors, it's a silly exercise to keep on keeping on, after a Chapter 7, Chapter 13, Chapter 11 or Chapter 12 bankruptcy gets filed in Arizona.

But while unsecured creditors (credit card creditors, medical bill creditors, and personal loan creditors are usually in this category) generally get depressed and go to sleep after a filing, and might file a proof of claim in the case so if there's a distribution they might get paid a few pennies on the dollar, other sorts of creditors may move faster.

Secured creditors (car liens, home mortgages, and engagement ring purchases over time) will often swing into action immediately after the filing of a bankruptcy by filing a request with the Bankruptcy Court for the District of Arizona to lift the stay and permit them to take any and all actions appropriate to their collateral.

Let's look at a stay lift on a mortgage. The collateral is the house. A completely upside down second mortgage holder is generally not going to bother with filing a motion to lift the stay, because the second mortgage holder may very well be effectively unsecured, and if they are, and know it, they just sit and experience depression. They may file a proof of claim.

But a first mortgage holder on a house will normally file a lift stay motion because a trustee's sale will either get 'em some dirt, or some money. And getting paid sooner is better than getting paid later, you know?

Yeah, I know you know.

So a first position secured creditor on a house that has some decent value will be something a creditor will want to grab as soon as possible.

A first position creditor on a house who files to lift the stay will generally file the motion to lift the stay sooner rather than later. Lately it seems to me that stay lift actions get filed within thirty days of filing, although banks are so overwhelmed with defaults these days that sometimes that won't happen.

Don't count on it, though!

Once a stay lift action is started, the debtor and the trustee in a Chapter 7 case have thirty days to respond.

And normally they don't.

The reason is simple.

There are two defenses to a stay lift action in Arizona (and elsewhere) that concerns a residential house and a first mortgage.

One is that the house is necessary to an effective reorganization.

Nobody in their right mind argues that in a consumer Chapter 7 Bankruptcy in Arizona, because there is no reorganization in progress in a Chapter 7 Bankruptcy in Arizona! It's a liquidation!

And the other defense to the stay lift doesn't get used much since the housing bubble burst. The other possible defense is that there is equity in the house for the estate!

Not for the debtor. For the estate.

And in Arizona that would normally mean that there is more than $150,000 equity in the house, so that the estate will benefit if the stay is kept in place and the house is sold by the trustee.

Now, that happens from time to time in Arizona, and in such bankruptcy cases, the Chapter 7 Trustee sells the house, and then gives the debtor a check for $150,000.

But in your case with your house?

Don't hold your breath.


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Full post as published by Arizona Bankruptcy Attorney Blog on September 16, 2010 (boomark / email).