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Massachusetts Agencies

Types of Stays

Bankruptcy

It is important to understand and distinguish between the types of stays that arise upon the filing of a petition in bankruptcy. In subsection (c) of Section 362 of the Bankruptcy Code it is provided that "the stay . . . against property of the estate . . . continues until such property is no longer property of the estate [while] the stay of any other act . . . continues until . . . a discharge is granted or denied." (Emphasis added). This section is referring to two distinct types of stays. The first one (the stay against property of the estate) is the one that is most important in conveyancing, for it is the one that governs, among other things, the foreclosure of mortgages. The second stay mentioned in the section is the one that prevents creditors from "badgering" the debtor. This latter type of stay will be supplanted by a discharge in bankruptcy, which is nothing more than a permanent injunction against creditors pursuing the debtor. So, it's evident that even when the debtor does in fact get a discharge in bankruptcy that the stay with which conveyancers are concerned – the one against property of the estate – is unaffected. Property remains property of the estate until the property is sold or abandoned or the case is closed. However, even though property may have been abandoned, and thereby become revested in the debtor, the automatic stay as against the enforcement on that property may continue. This is because Section 362 provides that the filing of a petition in bankruptcy "operates as a stay, applicable to all entities, of . . . (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 this title." (Emphasis added.)

The stay provides the basis for the orderly administration of the bankruptcy estate. Acts in violation of the stay, at least in the First Circuit (and in many other circuits) are void, not simply voidable. It is important to recognize that the stay affects the enforcement of liens even if no notice of the bankruptcy appears in the public records. In order to commence or continue with a foreclosure action, therefore, it is necessary that the lender determine whether a bankruptcy is pending and, if so, have the court "lift" the stay so that the foreclosure may proceeds. In some instances, however, the court may only partially lift the stay, authorizing foreclosure only up to the point of the auction and reserving the right to take one "last look" at the situation before the property is permitted to leave the estate.

In connection with the automatic stay something should be said about the difference betweenenforcing a lien, as in the case of a foreclosure, and simply perfecting it. Fort example, although a mechanic lienor could not sell property to satisfy a lien in the case of a pending bankruptcy, the lienor would be permitted to take the actions required under G.L.c. 254 to perfect the lien or prevent it from being extinguished. See, for example, In re Yobe Electric, Inc., 30 B.R. 114 (Bkrtcy W.D. Penn 1983).