Why Do Big Banks File Frivolous Motions for Relief from Stay in Chapter 7 Bankruptcy Cases?

Frivolous Motion for Relief from Stay in Chapter 7 BankruptcyI’ve written several articles over the years explaining the Automatic Stay in Bankruptcy, but before I get to the subject of this post—when a creditor’s Motion for Relief from Stay is frivolous—a brief refresher on the Automatic Stay is in order. Bankruptcy Code section 362 grants a debtor in bankruptcy an immediate and powerful protection from his or her creditors. When a bankruptcy case is filed, the Automatic Stay goes into effect, well, automatically. The Stay is a temporary injunction against any and all collection efforts against the debtor, such as lawsuits, repossessions, garnishments, evictions, foreclosures, or payment demands of any kind. But certain creditors, like mortgage lenders, can ask the Bankruptcy Court to lift the Automatic Stay so that they can continue with a foreclosure, for example. They do this by filing a Motion for Relief from Stay. In a Chapter 7 Bankruptcy case, courts will generally grant a mortgage lender relief from the Automatic Stay, which means the lender will then be able to pick up where they left off before the bankruptcy case was filed and proceed with foreclosure.

Keep in mind, however, that a Chapter 7 bankruptcy case only lasts ninety days in most cases. Yes, the case can last longer, if for example, the Chapter 7 bankruptcy debtor has non-exempt assets for the Chapter 7 trustee to liquidate, or if the court issues an order delaying the closing of the case pending a hearing on a car loan reaffirmation agreement. But in the majority of Chapter 7 bankruptcy cases, the debtor will receive his discharge and the case will close three months from the filing date. And when the case closes, the Automatic Stay expires, leaving a secured creditor like a mortgage lender free to continue with a foreclosure.

Now, consider the following common scenario. A debtor with no non-exempt assets to liquidate has filed a Chapter 7 bankruptcy case. She is underwater on her home, the lender has stubbornly refused her attempts to modify her mortgage payments, and she has decided to surrender the property because she cannot afford the monthly payments. She has no auto loan to reaffirm. The Chapter 7 bankruptcy trustee promptly filed a Report of No Distribution at the conclusion of her Meeting of Creditors (notifying all her creditors that the trustee was satisfied that there are no assets to liquidate in the case). Oh, and her Chapter 7 case was filed two months and three weeks ago. All signs point to the fact that the debtor will receive a discharge in the coming week, and the case will close the following day. That’s right, the case will close in the coming week, and that means the Automatic Stay will expire … automatically.

Why on earth, we might ask, would this Chapter 7 debtor’s mortgage lender file a Motion for Relief from Stay now? They have to give the debtor at least 14 days’ notice of the hearing on their motion. And more often than not, the Bankruptcy Court’s hearing calendar may only accommodate that hearing three to four weeks after the Motion for Relief from Stay is filed. This means that the hearing on their motion will be set for a date after the Automatic Stay will have already expired. When the hearing comes up, the bankruptcy judge won’t rule on their motion. He or she will merely note on the record that the Automatic Stay has already expired and that the mortgage lender’s motion is moot.

So, why do mortgage lenders file frivolous motions for relief from stay in Chapter 7 bankruptcy cases? This question is akin to how many licks does it take to get to the center of a Tootsie Pop®? The world may never know. I’m pretty sure that it all comes down to attorneys’ fees. The handful of law firms that represent the Big Banks appear to have been given carte blanche by their clients to file Motions for Relief from Stay in every case, whether or not it makes sense. I suspect they bill their Big Bank clients more to file one of these motions than the typical consumer debtor attorney charges for an entire Chapter 7 case. Heck, these Big Bank clients are the definition of “deep pockets,” after all. But any reasonable observer can only conclude that such motions represent a frivolous waste of time, money, and judicial resources. Just another example of how the banking industry pursues wasteful, harmful, irrational policies that harm the consumers of our country.


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