Effect of the Automatic Stay
Under section 362, the filing of a bankruptcy petition automatically invokes a stay of virtually all actions against the debtor or property of the estate to collect pre-petition claims. (There are exceptions – 11 U.S.C. 362(b) – not applicable here.) The stay preserves the debtor’s assets so that they can be reorganized or liquidated in a fashion that provides for equal
distribution to creditors. The stay is of critical importance in the foreclosure context as the filing of the stay stops a foreclosure sale.
Section 362(a)(l)-(8) species the acts stayed by the filing. Those of primary importance for nonjudicial foreclosure are (3), (4), and (5):
“(a) Except as provided in subsection (b) of this section, a petition filed under Section 301, 302, or 303 of this title … operates as a stay, applicable to all entities, of …
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect or enforce any lien against property of the estate;
(5) any act to create, perfect or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under the Code.
Under section 541, the filing of a petition creates an estate consisting of all legal and equitable interests of the debtor in property as of the date of filing. Obviously, this would include real property to which the debtor holds title, including the home being threatened with foreclosure. In Chapter 7, the debtor selects exemptions as described above from property of the estate, including a real property exemption. Once selected, and unless obligated to by the trustee or a creditor [Bankruptcy Rule 4003(b)], exempt property is no longer property of the estate and under section 362(c)(1) might be in jeopardy. However, section 362(a)(4) and (5) provide continued protection from the enforcement of liens – in this context – foreclosure. Section 362(a)(4) protects the property of the estate, that is, the deed of trust holder’s debt value. Section 362(a)(5) bars any act to enforce a lien against property of the debtor, that is, the debtor’s equity claimed exempt.
Under 11 U.S.C. section 1306(a), property of the estate in a Chapter 13 also includes all property the debtor acquires during the time the case is pending. Section 362(a)(4) would continue to protect property administered under the plan in this context as well.
The automatic stay continues in effect until one of the following events occurs:
(1) Property is no longer property of the estate,except when such property of the debtor is specifically protected under another subsection of 352.
(2) The case is closed.
(3) The case is dismissed.
(4) Discharge is granted, wherein the stay which terminates under section 362(c)(2) is replaced by a permanent injunction under section 524(a).
(5) Relief from the stay is granted under section 362(d)-(g).
In a Chapter 12 or Chapter 13 case, sections 1201 and 1301 respectively stay the collection of a consumer debt from a guarantor or other co-debtor (co-signer) once the petition is filed, to the extent that the plan calls for payment of the creditor. A consumer debt is defined in section 101(7) as a debt incurred primarily for personal, family, or household purposes. This stay terminates automatically twenty (20) days after a request by the creditor unless the debtor specifically and affirmatively objects to the termination. [11 U.S.C. 1201(a), 1301(d).]
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