Bankruptcy Automatic Stay and Arbitration Clauses

One of the ways in which consumer bankruptcy protects debtors is through the automatic stay. According to the Cornell Legal Information Institute (LII), the automatic stay is “one of the fundamental debtor protections provided by the bankruptcy laws,” since it “gives the debtor a breathing spell from his creditors.” More specifically, the automatic stay “stops all collection efforts, all harassment, and all foreclosure actions.” The automatic stay is supposed to prevent any creditors from continuing any sort of attempts to collect or recover money, property, or other claims against the debtor as soon as the debtor files for personal bankruptcy, whether it is Chapter 7 bankruptcy of Chapter 13 bankruptcy.
However, a recent bankruptcy case in the Northern District of Illinois determined that the automatic stay did not apply to a particular situation in which the parties had previously signed an arbitration agreement. We will say more about how the automatic stay functions, and then we will say more about the case.
What is an Automatic Stay and How Does it Work in Consumer Bankruptcy Cases?
The automatic stay in a Chapter 7 or Chapter 13 bankruptcy case is supposed to stop creditors from continuing to contact the debtor or to take additional action against the debtor. In most cases, the automatic stay stops a creditor or debt collector from any efforts to recover—phone calls, emails, lawsuits, foreclosure proceedings, etc. In short, the automatic stay is designed to prevent a collector from taking any further steps toward collection, and it takes effect as soon as a debtor files for bankruptcy.
Yet the automatic stay is not an absolute protection. Creditors are allowed to ask the bankruptcy court to “lift” the automatic stay, which means asking the bankruptcy court to say that the automatic stay does not apply in a particular circumstance. Sometimes the automatic stay does not apply at all—for example, to child support obligations. But there may be other situations in which the bankruptcy court will lift the automatic stay when a creditor requests it. This is most common when there is a secured creditor, but it can occur in some situations with an unsecured creditor.
In the present case, the creditor wanted the automatic stay lifted due to a previous arbitration agreement.
Facts of the Case: In Re Argon Credit, LLC
In the recent bankruptcy case of In Re Argon Credit, LLC (2018), the debtor, Argon, was also a lender and entered into an arbitration agreement with borrowers. While the facts of the case are complex in terms of Argon’s debts and the full scope of its bankruptcy case, the key facts of this particular matter concern the arbitration agreement and whether an arbitration clause can produce a modification of the automatic stay.
The borrowers wanted the bankruptcy court to enforce the arbitration agreement. The bankruptcy trustee and other interested parties argued that the borrowers should file claims against the estate in the bankruptcy matter or seek other remedies outside a modification of the automatic stay. The court explained that federal bankruptcy law says that “the court generally has no discretion to continue staying the arbitration proceedings unless the proceedings are ‘core’ proceedings.” As such, the court reasoned that “non-core” issues can result in the court lifting the stay to allow the arbitrations to move forward.
The court determined that the loans at issue between Argon and the borrowers (and other interested parties) were “non-core” issues since the question of the validity of the loan contracts “plainly [did] not stem from the bankruptcy itself,” and thus the court lifted the automatic stay.
Contact an Oak Park Bankruptcy Lawyer
If you have questions about the automatic stay and your consumer bankruptcy case, you should talk to an Oak Park bankruptcy attorney. Contact the Emerson Law Firm today.
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