Removing Bankruptcy's Automatic Stay: Past Due Car and House Payments

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The automatic stay is an injunction put in place at the beginning of a bankruptcy case that prohibits a creditor from taking certain actions to collect debt. Those actions include attempts to repossess cars and foreclose on home mortgages. 

Read more about what the automatic stay does at The Automatic Stay: How It Protects You When You File Bankruptcy.

Secured debt is debt for which you pledged collateral, like a car or a house.

If you owe past due car or house payments when you file bankruptcy, it is important to understand that bankruptcy does not give you a free ride on your secured debt. If you want to keep the collateral, you have to pay the lender at least what the collateral is worth, regardless of whether you file a Chapter 7 straight bankruptcy, a Chapter 13 payment plan case or a Chapter 11 reorganization

In a Chapter 7 case, unless you surrender the collateral you will either redeem the collateral for its value or you will reaffirm the contract you originally signed. To redeem the collateral, you pay the creditor the value of the collateral, usually in one lump sum, rather than continuing the contract you originally signed. When you reaffirm the contract, you agree to take the contract out of the bankruptcy process and forgo the discharge on that particular debt. You will continue making the payments under the original contract.

If you fail to make those payments, after the bankruptcy case is over the creditor can repossess the vehicle and potentially sue you for any deficiency balance after the car is sold.

In a Chapter 13 case, you will continue to make payments on your secured debt either as a part of the payment you make through the court or directly to the creditor.


Getting Around the Automatic Stay

When a debtor fails to make payments on the secured debt during the bankruptcy case, the creditor has options. It can choose to wait until the case is over to repossess or foreclose. Or, it can file a motion with the bankruptcy court asking that the court remove the automatic stay and allow it to repossess or foreclose. 

We do not see many motions to lift the stay in Chapter 7 because of the limited time a Chapter 7 case lasts - usually less than six months. In that case, if you are not making your payments, your creditor will likely elect to wait until the end of the case, after which it will be free to repossess or foreclose.

In a Chapter 13 case, your vehicle or house payment may become a part of the monthly payment plan or it could be paid directly to the creditor outside the plan. Unfortunately, especially in a Chapter 13 or a Chapter 11 case which take years to complete, it's not hard to get behind on your payments. When that happens, the creditor is much more likely to ask the court to lift the stay to allow repossession or foreclosure in order to protect its interest in a property that can be rapidly declining in value or not adequately protected by insurance or an equity cushion.

To win on the motion, the creditor will have to show the court that you have no equity in the collateral and that you do not need it to have a successful Chapter 13 case or to reorganize your debt. 

Catch-up Agreements and "Drop Dead" Clauses

Even if you get behind while you are in bankruptcy, you may still be able to avoid losing your collateral. Almost always, the lender would much rather have the money than the collateral and would be willing to work a deal to get you caught up. In many jurisdictions, the courts will allow the creditor and the debtor to enter into an agreement that contains a schedule of payments designed to bring the account current. Three to six months is a typical time frame. This type of agreement will almost always contain a "drop dead" provision that the automatic stay will automatically dissolve or lift if you fail to make payments or you otherwise put the collateral in jeopardy, like allowing insurance to lapse.

That way, the lender will be able to repossess or foreclose without having to file yet another motion. 

While such "agreed orders" can be a lifesaver if you have suffered a temporary setback, the catch up amount will include the cost that the creditor incurred to bring the motion, including attorney's fees and court costs, which can add as much as $1,000 to what you owe. 

For more on how the automatic stay works in a bankruptcy case, see

The Automatic Stay: How It Protects You When You File Bankruptcy

Removing Bankruptcy's Automatic Stay: Introduction

Removing Bankruptcy's Automatic Stay: Lawsuits and Insurance Claims

Removing Bankruptcy's Automatic Stay: Utilities and Rent

Your Rights When a Creditor Violates the Automatic Stay