Can a Borrower Effectively Waive the Automatic Stay Before Filing Bankruptcy?

Introduction

Let's review whether a borrower’s agreement to waive the “automatic stay” in a pre-bankruptcy document is enforceable.  This article also highlights the latest developments regarding the federal “Corporate Transparency Act”. 

Pre-Bankruptcy Stay Waivers

The automatic stay is the primary protection for a borrower who files bankruptcy (i.e., a “debtor”).  The stay goes into effect automatically upon the filing of the bankruptcy petition, and it prevents creditors from taking certain actions against the debtor or property of the debtor’s bankruptcy estate, including enforcing a lien against such property.  As a result, a creditor generally must obtain relief from the automatic stay from the bankruptcy court before enforcing its lien.

Creditors sometimes attempt to avoid or limit the effectiveness of the automatic stay by including a waiver of the stay in a pre-bankruptcy loan document, such as a forbearance agreement.  Courts throughout the country have arrived at differing conclusions regarding the enforceability of these waiver clauses. 

On February 13, 2025, a bankruptcy court in Illinois considered the enforceability of a stay waiver in a pre-bankruptcy forbearance agreement (the "Agreement").[1]  Under the Agreement, the lender agreed to forbear from collecting its loan for seventy-five days, during which the borrower was to make periodic interest payments and then also pay off the loan in full, failing which real estate loan collateral would be conveyed to the lender by recording a deed in lieu of foreclosure.  The Agreement also prohibited the borrower from filing bankruptcy for ninety-one days after the deed in lieu of foreclosure was recorded and included a stay-waiver clause whereby the borrower agreed that a bankruptcy filing would “constitute [its] consent to relief from the automatic stay”. 

The borrower defaulted on some of the payments due under the Agreement and then filed a Chapter 11 bankruptcy case.  The lender responded by filing a motion with the bankruptcy court to obtain relief from the automatic stay to record the deed in lieu of foreclosure, asserting that its motion should be granted because of the Agreement’s stay-waiver clause.

The Illinois bankruptcy court denied the lender’s motion and held that stay waivers are unenforceable as a matter of law, offering three reasons for its holding.  First, the court noted that upon filing Chapter 11 bankruptcy, the borrower becomes essentially a new entity – a “debtor in possession” – which has a fiduciary duty to all creditors.  In other words, the pre-bankruptcy borrower cannot strip the new entity of a right (i.e., the automatic stay) before the new entity has even come into existence.

Second, the Illinois bankruptcy court emphasized that enforcement of pre-bankruptcy stay waivers would undermine a core purpose of the Bankruptcy Code: to provide a “nationally uniform remedy to debtors and creditors.”  Third, the court reasoned that pre-bankruptcy stay waivers go against the public policy of protecting the interests of all creditors where a forbearance agreement is between the debtor and only a single creditor. 

The Illinois bankruptcy court echoed rationales that bankruptcy courts in the federal Fourth Circuit, which covers Virginia, have applied to the same issue.  For example, in 2017, a bankruptcy court in North Carolina held that a pre-petition stay waiver was unenforceable as a matter of public policy because “[u]pholding pre-petition waivers of this sort deprives debtors of the ‘breathing spell’ contemplated by the Bankruptcy Code and thwarts the congressional intent underlying imposition of the automatic stay.”[2] 

However, some earlier bankruptcy court decisions within the Fourth Circuit leave open the possibility that a pre-bankruptcy stay waiver in a forbearance agreement can be enforced.  For example, in 1995, a court in South Carolina recognized that circumstances may exist in which a stay waiver may be enforced, such as where the borrower is a sophisticated party and the lender has not received payments provided for in the forbearance agreement.[3] 

Some recent decisions by bankruptcy courts outside the Fourth Circuit offer more guidance about when stay waivers may be enforced, listing the following factors to be considered:

1. The sophistication of the party making the waiver;
2. The consideration for the waiver, including the creditor's risk and the length of time the waiver covers;
3. Whether other parties are affected including unsecured creditors and junior lienholders;
4. The feasibility of the debtor's plan of reorganization;
5. Whether there is evidence that the waiver was obtained by coercion, fraud, or mutual mistake of material facts;
6. Whether enforcing the waiver will further the legitimate public policy of encouraging out-of-court restructurings and settlements;
7. Whether there appears to be a likelihood of reorganization;
8. The extent to which the creditor would be prejudiced if the waiver is not enforced;
9. The proximity in time between the date of the waiver and the date of the bankruptcy filing and whether there was a compelling change in circumstances during that time; and
10. Whether the debtor has equity in the property and the creditor is otherwise entitled to relief from the automatic stay.[4]

As bankruptcy courts have written, however, “there is no uniform test” and the "weight given to each factor will vary on a case-by-case basis and must be left to the sound discretion of the court, based upon the equities, facts and circumstances presented."[5]  

Therefore, Lenders should keep at least the following in mind when including a stay waiver in a pre-petition agreement:

• Jurisdictional Variability:  The enforceability of the stay waiver will depend on the jurisdiction in which the debtor files a bankruptcy petition, and if the bankruptcy court refuses to enforce a waiver, a plan to seize collateral swiftly in a bankruptcy scenario may be thwarted.
• Proper Documentation:  The pre-petition agreement should make clear that the stay waiver is the result of transparent, arms-length negotiations, and should highlight the debtor’s informed consent and the consideration provided in exchange for the waiver.

“Corporate Transparency Act” Update

On March 21, 2025, the U.S. Treasury Department – through its Financial Crimes Enforcement Network (“FinCEN”) – adopted an interim final rule that removes the requirement for U.S. companies and persons to report beneficial ownership information (BOI) to FinCEN.  The interim final rule became effective on March 26, 2025.  

Therefore, as of March 26, 2025, a “reporting company” under the CTA refers to entities that were formed under the law of a foreign country and have registered to do business in any U.S. state or tribal jurisdiction.  On the other hand, entities created by filing a document with a secretary of state or similar office of a U.S. state (i.e., domestic companies) are exempt from reporting requirements.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice.  Readers with particular needs on specific issues should retain the services of competent counsel.

[1] This case is In re DJK Enters., LLC, 2025 Bankr. LEXIS 327 (Bankr. S.D. Ill. Feb. 13, 2025).

[2] This case is In re Jeff Benfield Nursery, Inc., 565 B.R. 603, *609 (Bankr. W.D.N.C. 2017).

[3] This case is In re Riley, 188 B.R. 191, 192 (Bankr. D.S.C. Sept. 15, 1995).

[4] These cases include In re Ramirez Carrero, 2022 Bankr. LEXIS 1505, 2022 WL 1721245, at *5 (Bankr. D.P.R. May 27, 2022); In re BGM Pasadena, LLC, 2016 U.S. Dist. Lexis 72825, (C.D. Cal June 2, 2016); and In re Frye, 320 B.R. 786, 790 (Bankr. D. Vt. 2005).

[5] The cases are SummitBridge Nat'l Invs. VI, LLC v. Orchard Hills Baptist Church, Inc. (In re Orchard Hills Baptist Church, Inc.), 608 B.R. 309, 317 (Bankr. N.D. Ga. 2019) and In re Frye, 320 B.R. 786, 790 (Bankr. D. Vt. 2005).