Removing Bankruptcy's Automatic Stay: Past Due Car and House Payments
One of the most powerful tools in the bankruptcy arsenal is the automatic stay. The automatic stay is an injunction that arises when a bankruptcy is filed. It is so powerful that it prohibits almost all attempts by creditors to collect almost any kind of 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.
Handling Secured Debts in a Bankruptcy Case
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
Sometimes, especially in a Chapter 13 case, a debtor will stop making payments on the secured debt. The creditor would suffer undue hardship as the collateral declines in value if it had to wait until the end of the three to five year Chapter 13 plan before it could act. Instead, the bankruptcy code gives the creditor an option. 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 is open - usually less than six months. In that case, if you are not making your payments, your creditor will likely elect to wait until the case is closed, 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, it's not hard to get behind on your payments. Because the Chapter 13 plan lasts three to five years, the collateral will lose a significant amount of value before the end of the case. To protect its interest, the creditor can ask the court to lift the stay to allow repossession or foreclosure. 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