Wednesday, May 23, 2012

The "Non Judicial" Relief from Stay in Bankruptcy

When a debtor files bankruptcy the Automatic Stay goes into effect immediately.  The Automatic Stay is found in the bankruptcy code at 11 USC 362(a).  The Stay operates as a legal injunction and prevents ALL creditors from making any collection action against the debtor.  Basically, when the stay is in place creditors are prevented from doing anything to collect the debt.

If the Creditor is Secured against property and the debtor is not paying on the secured debt in bankruptcy the creditor will often seek what is called relief from the automatic stay.  This relief allows the stay to be lifted for purposes of collecting on a specific debt. The most common examples are when debtors file bankruptcy but do not make ongoing payments on a mortgage or auto loan.  The creditor has the right to come in and ask the Court to lift the stay so they can proceed with a foreclosure or a repossession.

There are 2 ways a creditor can get relief from the automatic stay. The first is the traditional way - the creditor files a motion and the Debtor has a period of time (on Oregon bankruptcy cases that is 14 days) to respond to the motion. If the debtor is in fact current with secured payments they may ask that the Judge keep the stay in place. If the debtor responds to the motion the Bankruptcy Judge will typically set a hearing and want to hear from both parties before making a decision on whether the stay can be lifted.

The faster and easier way to get the stay lifted is for the parties to agree that the stay should be lifted and sign off on what is called "Non Judicial Relief". This is simply a form that the debtor, creditor and Trustee sign and it gets filed with the Court and the stay is automatically lifted as to that specific debt.

The most common reason that the Debtor would agree to this is when they just want to return collateral. I recently had a client file a chapter 7 and had an auto loan that he simply wanted to give back. He dropped the car off at the lender's local branch (called a "voluntary repossession"). Even though he gave the car back the stay was in place so the lender could not sell the car at auction because they would be considered an automatic stay violation.  So, the lender faxed me over the Non Judicial Relief form and everyone signed off on it allowing the lender to sell the car without having to go through the lengthier process of filing a motion and waiting out the 14 days.

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