Just When You Thought The Automatic Stay Was Terminated: The New Abandonment Rule in Bankruptcy - Dec 2014

Terry Jessop & Bitner Newsletter

Issue 16, December 2014

The Debtor, the Stay, and the Bankruptcy Estate

When a debtor files chapter 7 bankruptcy, two things happen instantly: first, the automatic stay goes into effect, prohibiting further collection efforts from creditors, except through the bankruptcy process; second, an "estate" is created containing all of the debtor's property. The debtor's estate is administered by an independent trustee. The automatic stay of bankruptcy protects not only the debtor, but also this newly created estate. If you want to repossess the debtor's property, or even if the debtor just wants to short-sell his home or give you back his car, it cannot be accomplished without: (i) a court order; (ii) the passage of time; or (iii) permission from both the trustee of the debtor's estate and the debtor.

Motions Terminating the Automatic Stay

The surest procedure for a creditor to get at property to repossess or sell is to file a motion with the bankruptcy court, which results in an order terminating the automatic stay both as to the debtor and as to the bankruptcy estate. Filing such a motion has a downside, which is that you have to hire an attorney, you have to pay filing fees and it takes nearly a month. The upside is we can usually complete the process for a flat fee. Give us a call.

Consensual Agreements

The next surest way to get the right to take the debtor's property is to reach an agreement. Until last year, that was a fairly simple process. All that was needed was an agreement signed by the debtor, his attorney, and an abandonment signed by the trustee. Those documents were often obtained at the first meeting of creditors or by a few phone calls or letters. That all changed last year when the Tenth Circuit Court of Appeals decided Cook v. Wells Fargo Bank, 2013 WL 1297590 (10th Cir. 2013). The Cook case requires formal notice to all creditors before property can be abandoned by the trustee. Consequently, the Utah Bankruptcy Court adopted a new local Rule 6007-1 creating a complicated, expensive process to obtain a simple abandonment. Where one form used to do the job, three are now required. First, a request is filed. If the trustee approves that request, a proposed abandonment is filed which must be noticed to all creditors. If no objection is filed then the third form, the actual notice of abandonment itself, is filed. If an objection is filed, the court schedules a hearing to determine the matter. The once simple process is now cluttered with confusing forms almost invariably requiring an attorney and virtually eliminating the use of abandonment by agreement.

Beware! The Stay is Not Terminated!

The most significant part of this new rule is that the automatic stay remains in effect for property of the estate until completion of the new cumbersome process or the entry of the order closing the bankruptcy case. Even the trustee's "No Asset Report" no longer suffices as a vehicle for terminating the automatic stay. Give us a call if you are not sure whether is coast is clear for the repossession of property.

©Terry Jessop & Bitner December 2014