Overview of the Bankruptcy Process for Real Estate Lenders

The bankruptcy process is much more complex for lenders than it is for landlords. To understand bankruptcy essentials for lenders, it helps to understand some basic concepts. There are three main types of bankruptcies that can be filed: (1) Chapter 7, (2) Chapter 13, and (3) Chapter 11. Chapter 7 bankruptcies are liquidation bankruptcies. In a liquidation bankruptcy, all of the debtor’s non-exempt assets will be sold off and the bankruptcy court will grant the debtor a discharge of all remaining unsecured debt. Liquidation is generally the simplest and easiest bankruptcy, but in the United States, it is rarely available for wage-earners. Congress created wage-earner consumer bankruptcy repayment plans in order to ensure that people who earn income are not able to run up substantial debt and then discharge it without making an attempt to pay the debt off using their disposable income. Congress adopted wage-earner plans with Chapter XIII in the Chandler Act of 1938, which became the modern-day Chapter 13 in the Bankruptcy Reform Act of 1978. In a Chapter 13 wage-earner plan, the debtor must devote the debtor’s disposable income toward the repayment of unsecured debts over the course of the next three to five years of the debtor’s life before receiving a discharge of remaining debts. Chapter 11 bankruptcies are more complicated. Chapter 11 is generally used in business bankruptcies rather than in consumer bankruptcies.

In a typical bankruptcy, the bankruptcy begins with the debtor filing a new bankruptcy case. The debtor’s law firm will send notice of the bankruptcy filing to all creditors. Soon after the case is filed, the debtor will file financial schedules. These schedules will list all of the debtor’s assets and liabilities. The debtor will also file a proposed bankruptcy plan. The plan will address how each creditor will be paid in the bankruptcy.

On the day that the debtor files a bankruptcy case, an automatic stay of all collections activities by creditors goes into effect. This “automatic stay” is the equivalent of a federal court order directed to all creditors telling them to stop their collections efforts, including foreclosure on collateral. Creditors must comply with the automatic stay or face serious penalties.

Real estate lenders often hire bankruptcy attorneys for the following purposes: (1) objecting to court confirmation of a debtor’s bankruptcy plan when the debtor’s treatment of the secured creditor’s claim in the plan is wrong or unfair, and (2) filing motions for relief from the automatic stay so that the creditor can foreclose on the creditor’s collateral. This article is primarily focused on providing information about these two issues for which a creditor will likely seek legal counsel.

Objections to Plan Confirmation

In a Chapter 13 wage-earner bankruptcy, the debtor who files bankruptcy is responsible for filing a proposed bankruptcy plan. The plan will state how the debtor proposes to pay his creditors over the next three to five years. The Chapter 13 trustee will review this plan to determine whether it complies with the bankruptcy rules, but the creditors must also review the plan to make sure that the plan treats the creditors fairly and correctly under the law. If the creditor’s treatment in the plan is wrong, then the creditor needs to file a written objection to the plan in the bankruptcy court. The creditor’s objection will then be taken up by the Court at the plan confirmation hearing. If the creditor fails to object before the plan confirmation hearing occurs, then the creditor might be stuck with wrong or unfair bankruptcy treatment because the bankruptcy courts are loathe to change the plan after it has been confirmed, at least on a creditor’s motion. The trustee, on the other hand, can and frequently does ask for plan modifications throughout the bankruptcy process.

The debtor bears the burden of proof on plan confirmation hearings. In re Colston, 539 B.R. 738, 746 (Bankr. W.D. Va. 2015) (“The debtor bears the burden of proof at confirmation, including as to good faith.”). Accordingly, the creditor can object without having to prosecute a motion on the objection. However, the creditor’s failure to object may bind the creditor even where the debtor’s plan should not have been approved unless the debtor proposed the plan with fraudulent intent, a substantially higher standard than mere good faith. Reasons to object to a plan include good faith, valuation, treatment of a particular claim, lack of adequate protection, and feasibility, among other reasons. “A debtor bears the burden of proof on the issue of valuation under 11 USC § 506(a).” Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 164 (Bankr. W.D. Pa. 2009); also see In re Finnegan, 358 B.R. 644, 649 (Bankr. M.D. Pa. 2006).

Term of Plan. The bankrupt debtor may not propose a plan for payments over a period of three years, unless the Court, for cause, approves a longer period, but the court may not approve a period that is longer than five years. In re Hussain, 250 B.R. 502, 508 (Bankr. D.N.J. 2000).

Loans on the Debtor’s Principal Residence May Not be Modified in Bankruptcy. Under 11 USC § 1322(b)(2), a Chapter 13 bankruptcy plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.” Real estate investors with an owner-financed, residential portfolio should take particular notice of this provision. The creditor on a residential mortgage should receive its payments even between the filing date and the plan confirmation date. Perez v. Peake, 373 B.R. 468, 487 (S.D. Tex. 2007). Under the Nobelman case, the debtor cannot bifurcate secured and unsecured portions of the holder of a principal residence lien. Collier on Bankruptcy P 1322.06 (16th 2017); Nobelman v. Am. Sav. Bank, 508 U.S. 324, 332, 113 S. Ct. 2106, 2111 (1993). Accordingly, such lien cannot be modified unless the lien is “completely undersecured” or “wholly unsecured,” which becomes an issue with second liens on principal residences. McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606, 610 (3d Cir. 2000).

Entitlement to Payment in Equal Monthly Installments Rather Than Pro Rata. Under 11 USC § 1325(a)(5)(B)(iii), the Chapter 13 plan must provide for payments to secured creditors in “equal monthly amounts.” Sometimes, debtors will list payments to the secured creditor as “Pro-Rata” in the plan. This amorphous term generally means that payments will be made to the creditor by priority pro rata with the creditor’s interest. Knowing exactly how payments will be made under pro rata treatment is difficult. The creditor may need to call the trustee’s office to ask how the trustee will apply payments under pro rata treatment. When reading a bankruptcy plan, the starting month for payment typically means the month following the case filing date, not the month following the plan confirmation date, unless otherwise specified.

What If I Fail to Object to Plan Confirmation? “The provisions of a confirmed plan bind the debtor and each creditor . . . .” 11 USC § 1327(a). There are lots of exceptions now to the common law rule that liens pass through bankruptcy unaffected. Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) (“[A] bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem.”); Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) (“Ordinarily, liens and other secured interests survive bankruptcy.”); also see 11 USC § 506(d)(2). If the creditor fails to object to the debtor’s treatment of the creditor in the plan, then the creditor probably loses the objection even if the objection would have succeeded. See In re Patterson, 107 B.R. 576, 579 (Bankr. S.D. Ohio 1989). But, there are limits. For example, “A secured creditor is . . . not bound by a plan which purports to reduce its claim where no objection [to the creditor’s secured claim] has been filed.” In re Howard, 972 F.2d 639, 641 (5th Cir. 1992). If the debtor tries to “challenge the amount of a secured claim either by asserting a counterclaim or offset against it or by disputing the amount or validity of the lien” then the debtor “must file an objection to the creditor’s claim in order to put the creditor on notice that it must participate in the bankruptcy proceedings.” Id. The debtor cannot dispute the amount or validity of the creditor’s claim solely by plan confirmation even where the creditor fails to raise a meritorious objection to the plan. On the other hand, “where the plan treats the secured claim in a fair and equitable manner, providing for full payment of the debt,” then the creditor probably waives objections to plan confirmation by failing to raise them prior to confirmation. In re Pence, 905 F.2d 1107, 1110 (7th Cir. 1990). To revoke the plan, the creditor must show that the debtor had “fraudulent intent” and the motion to revoke the plan must be brought as an adversary proceeding. 11 U.S.C.S. § 1330; USCS Bankruptcy R 7001. So, to confirm the plan, the debtor need only show good faith (11 USC § 1325(a)(3)), but to revoke the plan, the creditor must show fraud (11 USC § 1330). In Pence, the debtor proposed to give property different from the creditor’s collateral to the creditor to satisfy the creditor’s claim. The Court allowed this when the creditor failed to object to plan confirmation. The difference between Pence and Howard appears to be that in Pence the debtor supported the plan proposal with an appraisal supporting the debtor’s allegation that the creditor would receive full value for the creditor’s claim, even though such allegation turned out to be false, but was not made with fraudulent intent on the debtor’s part. Also see https://www.abi.org/abi-journal/chapter-13-plan-confirmation-its-finalmaybe for a reconciliation of caselaw. The bankruptcy code provides for modification of plans after confirmation, generally due to changed circumstances, but not on the motion of a secured creditor. 11 USC § 1329. Also see In re Dominique, 368 B.R. 913, 919 (Bankr. S.D. Fla. 2007) (saying that wrongful modifications through the plan cannot result in a discharge).

Cure of Pre-Petition Arrearage. The debtor can pay off pre-bankruptcy arrearage over a “reasonable time,” typically six to twelve months. 11 U.S.C.S. § 1322(b)(5) (the plan can “provide for the curing of any default within a reasonable time . . . .”). The debtor’s cure prevents acceleration of the debt and can be made even on a principal residence. 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017).  “A long-term debt dealt with by the chapter 13 plan in the manner authorized under section 1322(b)(5) is excepted from any discharge granted under section 1328, and the creditor’s lien remains intact, except to the extent it may have been declared void pursuant to section 506(d).” Id. This section can be used to cure post-petition defaults as well as pre-petition defaults, so the debtor can propose a modified plan that would cure postpetition mortgage payments that the debtor falls behind on during bankruptcy.  In re Mendoza, 111 F.3d 1264, 37 C.B.C.2d 1691 (5th Cir. 1997); In re McCollum, 17 C.B.C.2d 431, 76 B.R. 797 (Bankr. D. Or. 1987); In re Simpkins, 6 C.B.C.2d 1081, 16 B.R. 95 (Bankr. E.D. Tenn. 1982); Green Tree Acceptance v. Hoggle (In re Hoggle), 12 F.3d 1008, 1010 n.3 (11th Cir. 1994). A debt cured under § 1322(b)(5) is excepted from discharge under § 1328 and the creditor’s lien remains intact, unless the lien has been declared void under § 506(d). 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017); 11 U.S.C. § 1328(a)(1), (c)(1); 11 U.S.C § 506(d); see also In re Gilbert, 472 B.R. 126 (Bankr. S.D. Fla. 2012); In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994).

Debtor Can Either Pay Secured Claim Off in the Plan Under § 1325(a)(5) or Cure Under § 1322(b)(5). If the debtor proposes a plan that provides the holders of allowed secured claims an amount not less than the allowed amount of the claim, then the debtor does not need to cure under § 1322(b)(5). In re Chappell, 984 F.2d 775, 779 (7th Cir. 1993). “The Bankruptcy Code does not authorize a chapter 13 debtor to cure defaults and simultaneously modify secured claims. Instead, the Code permits a chapter 13 debtor to propose a plan that utilizes one or the other of these two options.” In re Hussain, 250 B.R. 502, 507 (Bankr. D.N.J. 2000). A “Debtor has two choices for treating the secured mortgage debts in his chapter 13. First, Debtor may modify the rights of the Lenders by reducing the interest rates from the original contract rate, but in order to do so, Debtor must provide for full payment of the allowed secured claims within the life of his chapter 13 plan. The other alternative is for Debtor to cure all pre-petition defaults through his five year plan and reinstate the original contracts by maintaining all future payments in accordance with the original terms of the mortgages.” Id. at 511.

What is a Reasonable Time to Cure Arrearages? Six months is probably considered a reasonable time to cure. In re Hence, 358 B.R. 294, 302 (Bankr. S.D. Tex. 2006). One court has said that “a reasonable time would ordinarily be between three and six months, and perhaps in extraordinary circumstances, nine or twelve months.” In re Hailey, 17 B.R. 167, 168 (Bankr. S.D. Fla. 1982).

Interest on Arrearages. Congress has substantially curbed charging of interest-on-interest, specifically with regard to pre-petition arrearages to be cured in the plan. In re Hence, 358 B.R. 294, 305-06 (Bankr. S.D. Tex. 2006); 11 USC § 1325(a)(5), § 1322(e) (overruling Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993)).

Acceleration After Bankruptcy. When the bankruptcy ends, the creditor should re-accelerate the debt rather than rely on the prior acceleration. Federal Nat’l Mortg. Ass’n v. Miller, 123 Misc. 2d 431, 473 N.Y.S.2d 743 (Sup. Ct. 1984); 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017).

Direct Pay Versus Paid Through the Trustee. Often arrearages are paid through the trustee while post-petition payments are made directly to the creditor. 8-1322 Collier on Bankruptcy P 1322.09 (16th 2017). This can save the debtor substantial money on trustee’s percentage fees given that the mortgage is often one of the largest payments. Perez v. Peake, 373 B.R. 468, 478 (S.D. Tex. 2007) (discussing debtor’s interest in avoiding trustee’s fees as a percentage of disbursements); First Bank & Tr. v. Gross (In re Reid), 179 B.R. 504, 508 (E.D. Tex. 1995) (“The Fifth Circuit expressly permits debtors to act as disbursing agents . . . . However, the decision to permit a debtor to act as his own disbursing agent is left to the discretion of the bankruptcy judge.”).

Cram Down Versus Non-Cram-Down. Generally, the debtor’s bankruptcy plan will categorize secured claims by listing them in a “Cram-Down” section or a non-cram-down section of the plan. The cram-down claims will have the terms of the claim altered, whereas the non-cram-down claims will not have the terms of the claim altered. The purpose of listing the claims separately is to make it easy for the creditor reading the plan to figure out whether to object or not. The creditor whose claim is listed in the non-cram-down section of the plan will rarely need to object. The cram-down creditors, however, may want to object for myriad reasons because their claims have been modified by the debtor.

Till Rates on Cram Down Claims. The Till rates are also referred to as the cram down rates because they change the contract terms without the creditor’s consent. Non-primary-residence loans must be paid out at the Till rates, which are the prime rate plus 1% to 3%. Till v. SCS Credit Corp., 541 U.S. 465, 480, 124 S. Ct. 1951, 1962 (2004). If the debtor proposes zero percent, then the creditor should object. Under 11 USC § 1325(a)(5)(B)(ii), the Chapter 13 plan must, for a secured creditor, provide property to be distributed to the creditor that “has a total ‘value, as of the effective date of the plan,’ that equals or exceeds the value of the creditor’s allowed secured claim.” Till, 541 U.S.  at 474. When the Chapter 13 plan does not provide for a lump sum payment to the secured creditor, then “the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value equals or exceeds that of the allowed claim.” Id. at 469. Surprisingly, the Supreme Court determined that the contract rate has no bearing on this inquiry, though four justices in a plurality opinion thought that the contract rate should be presumptively be the plan rate. Id.

Lien Stripping. When a secured creditor receives a lien-stripping notice, it is time to call a creditor’s bankruptcy attorney. When a debtor alleges that a creditor is fully or partially undersecured, then the debtor may try to strip off the lien and have the lien voided altogether or may try to strip down the lien to the value of the property. Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995 (2015); 11 USC § 506(d). Depending on the jurisdiction that the case is located in, strip-off or strip-down may require the filing of an adversary action (which is like a separate lawsuit handled within the bankruptcy case involving heightened pleading and notice requirements) or merely handled through the plan confirmation process.

“A debtor bears the burden of proof on the issue of valuation under 11 USC § 506(a).” Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 164 (Bankr. W.D. Pa. 2009); also see In re Finnegan, 358 B.R. 644, 649 (Bankr. M.D. Pa. 2006). Moreover, mortgagees are entitled to due process before their constitutionally-protected security interests are removed. See generally Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 (U.S. 1983); Eric S. Richards, Due Process Limitations on the Modification of Liens Through Bankruptcy Reorganization, 71 Am. Bankr. L.J. 43, 45–46, 50 (1997). When a debtor tries to void a creditor’s lien by 11 USC § 506(d), the debtor needs to give notice of its intention to do so. In re King, 290 B.R. 641, 648 (Bankr. C.D. Ill. 2003). If the creditor fails to object, then the bankruptcy court might not even make the debtor offer evidence on valuation at the plan confirmation hearing, despite the debtor’s burden of proof. Id. Debtor’s attorneys often use tax roll data for lien-stripping, but this is generally not proper or very poor valuation evidence. See Blakey v. Pierce (In re Blakey), 76 B.R. 465, 471 (Bankr. E.D. Pa. 1987) (“We note, however, that we would not admit into evidence the City’s admission, per its appraisal, that the value of the premises was $13,200 against the Mortgagee.”); also see In re Cole, 81 B.R. 326, 328-29 (Bankr. E.D. Pa. 1988) (“We are unwilling to give much, if any, weight to the City’s ‘appraisal of the premises . . . . We have even less indicia of what went into this determination than we do of Mr. Graham [an expert witness who testified regarding valuation].”). For additional authority, see 4-506 Collier on Bankruptcy P § 506.03 (16th ed.) (“[V]alue testimony by nonexperts is often viewed as unpersuasive, if not inadmissible.”). The proper way to offer valuation evidence of real estate is through an appraisal. Cf. Nationsbanc Mortgage/Federal Nat’l Mortg. Ass’n v. Williams (In re Williams), 276 B.R. 899, 909 (C.D. Ill. 1999)

Does Lien-Stripping Require an Adversary Proceeding? “Allowing the debtor to avoid a lien through the Chapter 13 plan confirmation process would . . . be contrary to the clearly expressed intent in the Code to prevent modification of rights of lien holders through a Chapter 13 plan when those parties have mortgages secured by the debtor’s principal residence.” In re Forrest, 424 B.R. 831, 834 (Bankr. N.D. Ill. 2009). Moreover, “It is the position of some courts that the avoidance of a lien envisioned by § 506 must be implemented through an adversary proceeding.” In re Nys, 2013 Bankr. LEXIS 93, 15 (Bankr. S.D. Ohio Jan. 8, 2013); see also Holderman v. Ben. Fin. I, Inc. (In re Holderman), 2011 Bankr. LEXIS 5707, 6 (Bankr. N.D. Ind. Dec. 20, 2011); Weichey v. NexTier Bank, N.A. (In re Weichey), 405 B.R. 158, 159 (Bankr. W.D. Pa. 2009) (debtors used an adversary proceeding to accomplish stripping under 11 U.S.C. § 506(a). “The majority of bankruptcy courts holds that a strip-off does not require an adversary proceeding.” Comment: Strip-Off: What is the Correct Procedure to Avoid a Wholly Unsecured Junior Mortgage?, 28 Emory Bankr. Dev. J. 463, 465 (2012). “Alternatively, the minority of bankruptcy courts holds the opposite view and requires an adversary proceeding pursuant to Rule 7001(2).” Id. As late as 2012, “no circuit courts [had] addressed the issue.” Id. at 407. The minority approach is supported by sound arguments, for example, “the plain language of Rule 7001 indicates that it applies to strip-off.” Id. at 504. Also, “Using an adversary proceeding [for lien stripping] may better address due process concerns because of the more formality of the process with a summons issued and the complaint served in accordance with F.R.B.P. 7004.” Giddens, Joel, Practical Considerations in Lien Stripping, p. 91, Third Annual Memphis Consumer Bankruptcy Conference, (American Bankruptcy Institute June 7, 2013). Lien-stripping in the Southern District of Texas does not require an adversary proceeding. Hardy Rawls Enters. LLC v. Cage (In re Moye), No. H-09-2747, 2010 U.S. Dist. LEXIS 83792, at *18 (S.D. Tex. 2010) (suggesting that the Southern District of Texas may follow the majority approach).

Filing for Relief from Stay

Secured creditors can ask the bankruptcy court to lift the automatic stay as to their collateral or to afford them “relief” from the automatic stay. This is commonly referred to as a “lift stay motion.” Secured creditors can file lift stay motions for “cause.” 11 U.S.C. § 362(d)(1). The most quintessential lift stay situation would be where a secured creditor wants to foreclose on real estate collateral, but cannot do so because the automatic stay of all collections activities in the bankruptcy case prevents this. The stay is called “automatic” because it arises automatically, without the bankruptcy court even having to sign an order, as soon as the bankruptcy case is filed. So, the creditor files a motion, in the federal bankruptcy court, to have the stay lifted so that the foreclosure can proceed in accordance with applicable state law. Foreclosure law and debtor-creditor law varies from state-to-state, but bankruptcy law is federal and bankruptcies are filed in federal court. Under the Supremacy Clause to the U.S. Constitution, the federal automatic stay of collections activities supersedes any state law to the contrary. Our founding fathers felt that the need for uniform bankruptcy law throughout the country was so important that the federal court’s bankruptcy powers come from Article 1, Section 8 of the U.S. Constitution, which are the few, original limited powers granted to the federal government.

When to File for Relief from Stay. Generally, if you have a secured debt and you are not being paid, then you will want to file for relief from the automatic stay. The reason for the general rule is that “a monthly payment to the mortgagee equal to the full contractual amount constitutes adequate protection under § 361(3) and . . . any lesser amount is inadequate protection.” In re Perez, 339 B.R. 385, 400 (Bankr. S.D. Tex. 2006) (“[I]t is incongruous to bless adequate protection payments to Chapter 13 residential lien holders in any amount less than the contractual amount required by the promissory note as the routine method to be adopted for adequate protection. To do so goes against the express intent of Congress. The only way to satisfy congressional intent is to use the flexible concept of “indubitable equivalent” and hold that making the contractual monthly payment constitutes an indubitable equivalent under 11 U.S.C. § 361(3).”). This general rule is very general, with myriad exceptions, because whether or not a motion for relief from stay will be granted is rarely clear. The stay can be lifted or modified for “cause,” and bankruptcy courts have significant discretion over what constitutes “cause.”

“Section 362(d)(1) of the Bankruptcy Code provides that the Court may lift the automatic stay for ‘cause.’ See 11 U.S.C. § 362(d)(1). However, the Bankruptcy Code does not define the term ‘cause,’ and the term is applied by the courts on a case specific basis. See Claughton v. Mixson, 33 F.3d 4, 5 (4th Cir. 1994) (“Because the Bankruptcy Code provides no definition of what constitutes ’cause,’ the courts must determine when discretionary relief is appropriate on a case-by-case basis.”) (citations omitted); Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990) (“‘Cause’ has no clear definition and is determined on a case-by-case basis.”) (citations omitted); Hudgins v. Security Bank of Whitesboro (In re Hudgins), 188 B.R. 938, 946 (Bankr. E.D. Tex.1995) (“[T]he Bankruptcy Code does not define the term ’cause.’ ‘Cause’ under § 362(d)(1) is not limited to those situations where the property of a party lacks adequate protection in the bankruptcy estate. Instead ’cause’ encompasses many different situations . . . .”) (citations omitted); In re Texas State Optical, 188 B.R. 552, 556 (Bankr. E.D. Tex. 1995) (“11 U.S.C. § 362(d)(1) provides for the modification of the automatic stay for cause. ‘Cause’ as used in § 362(d)(1) has no clear and limited definition and, therefore, is determined on a case by case basis. ‘Cause’ is an intentionally broad and flexible concept that permits the Bankruptcy Court, as a court of equity, to respond to inherently fact-sensitive situations.”) (citations omitted); cf In re Novak, 103 B.R. 403, 411-12 (Bankr. E.D.N.Y. 1989) (finding in a Chapter 12 case, debtor’s failure  [*47] to timely confirm plan is “cause” for relief from automatic stay, despite the existence of an equity cushion).” In re Futures Equity L.L.C., Nos. 00-33682-BJH-11, 00-34825-BJH-11, 00-34826-BJH-11, 2001 Bankr. LEXIS 2229, at *45-47 (Bankr. N.D. Tex. 2001).

We do, however, know some things about what constitutes cause. A lack of good faith may constitute sufficient cause to provide relief from the automatic stay. In re Haydel Props., LP, No. 16-51259-KMS, 2017 Bankr. LEXIS 842, at *6 (Bankr. S.D. Miss. 2017). Many lift stay motions generally allege a lack of good faith as grounds for relief. Also, failure to comply with the terms of the plan constitutes cause for relief from stay. In re Patterson, 107 B.R. 576, 579 (Bankr. S.D. Ohio 1989); 11 USC § 362(d)(1). If the creditor obtains the trustee’s record, showing the debtor to be in arrears, then that constitutes cause for relief from stay. Id. If the plan makes provision for payment of the creditor’s claim, then issues of lack of adequate protection are res judicata as of confirmation of the plan. Patterson, 107 B.R. at 578. This is true even where the creditor’s adequate protection objection “probably would have succeeded.” Id. An equity cushion alone can be adequate protection. Bank R.I. v. Pawtuxet Valley Prescription & Surgical Ctr., 386 B.R. 1, 5 (D.R.I. 2008). Anything less than a ten-percent equity cushion is probably inadequate and even ten-percent has been adequate only where the debtor proposed monthly payments to cover interest accruing on the claim. Id. at 10; Also see Skelton v. Urban Tr. Bank (In re Skelton), Nos. 12-34350, 12-3184, 2013 Bankr. LEXIS 3137, at *30 (Bankr. N.D. Tex. 2013). A twenty-percent equity cushion is more likely to obviate any need to provide additional adequate protection. In re Haydel Props., LP, No. 16-51259-KMS, 2017 Bankr. LEXIS 842, at *1 (Bankr. S.D. Miss. 2017). Using cash collateral to pay administrative claims without providing additional security to the creditor may be grounds for relief from the automatic stay. In re Geijsel, 480 B.R. 238, 272 (Bankr. N.D. Tex. 2012).

Contents of an Order Modifying the Automatic Stay. Most lift stay motions result in the entry of an agreed order modifying the automatic stay rather than an order lifting the stay. The contents of such agreed orders vary, but can typically include: (1) a warning regarding the applicability of 11 USC § 109(g), (2) provisions for cure of arrearage, (3) provisions regarding tax and insurance issues, particularly on non-escrowed loans, (4) provisions regarding default on the modified stay order and automatic lifting of the stay in the event of default on the order, (5) notice provisions to the debtor or debtor’s counsel to advise of default on the order and lifting of stay, (6) provision that the order will survive a conversion of the case to another chapter of the Code, and (7) provision that the terms of the order no longer apply upon dismissal of the case, (8) provision that a non-sufficient funds check does not constitute a timely payment, (9) provision that any default on trustee payments constitutes a default on the modified stay order, and (10) provision for modifying the plan to cure arrearages and attorney’s fees related to the lift stay motion, inter alia.

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.