Relief from Automatic Stay and Bankruptcy in Colorado

November 5, 2010

By: David M. Serafin

When a chapter 7 or chapter 13 bankruptcy is filed in Denver or anywhere in Colorado, the bankruptcy Automatic Stay provisions, which prevent against any collection activity by any creditor (in Colorado or anywhere else), are immediately triggered by operation of law.  A common issue when representing bankruptcy clients in Colorado arises when a secured creditor or lender files a Motion for Relief from Automatic Stay regarding collateral held by the debtor.  The debtor may be behind on monthly payments for an “upside down” property and/or may simply want to surrender the collateral.

For clients who wish to keep the property and continue making monthly payments, a Motion for Relief from Automatic Stay typically creates anxiety that the property will be repossessed or foreclosed upon.  But, I always advise clients that Relief from Stay does not necessarily mean that the lender will actually repossess or foreclose.  Rather, when a bankruptcy petition is filed, the lender is in a position where (absent Relief from Stay) it cannot do anything to enforce its security interest if the collateral’s depreciating, it acts to protect its security and is one step closer to enforcing its interest, if necessary.

Most Motions for Relief from Automatic Stay are granted by default judgment in Colorado Bankruptcy Court simply because a bankruptcy debtor feels powerless to oppose the lender.  The court has considerable discretion in the granting of this motion.  However, even if the debtor falls behind in monthly payments, the most common defense is that such relief is not appropriate if the debtor has an equity cushion in the property.  As such, the existence of equity provides the lender with adequate protection (as defined by Section 361 of the Bankruptcy Code) such that its security interest remains intact.

For example, in the case of a $100,000 mortgage on a $200,000 house, the existence of $100,000 of equity provides adequate protection to the lender such that (with continuation of the bankruptcy automatic stay) the lender can still easily satisfy its claim in the event of a later foreclosure (barring a sudden and extreme depreciation of the property’s value).

In chapter 13 bankruptcy matters and particularly with regard to motor vehicles (which, unlike real estate, depreciate even in a strong economy), it is common to add a provision by which the lender will receive monthly adequate protection payments to compensate for the depreciating collateral.  

Bankruptcy debtors can also show to lenders and the Colorado Bankruptcy Court that adequate protection exists is there’s no possibility of the collateral being destroyed, particularly if the property is fully insured.  Additionally, the Court can re-consider Relief from Stay should circumstances change.

In short, if the debtor in Colorado can demonstrate that the lender will not suffer any economic harm by continuation of the automatic stay, the Motion for Relief from Automatic Stay will be denied.

Regardless, Relief from Stay may be deemed appropriate should a creditor initiate legal proceedings against a debtor which are related whatsoever to the bankruptcy or if such litigation concerned a debt which cannot be discharged, such as student loans (assuming there’s no showing of the debtor’s economic hardship).

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