Removing Bankruptcy's Automatic Stay
When you filed your bankruptcy case, a powerful tool called the automatic stay when into effect to make the process of filing bankruptcy more useful for you and more protective of your property. The automatic stay is an injunction that prevented your creditors from taking further collection actions against you. They were prohibited from repossessing your car, foreclosing on your house, or continuing lawsuits, garnishment of your wages, collection calls, and demand letters. You can learn more about what the automatic stay can and cannot do at The Automatic Stay: How It Protects You When You File Bankruptcy.
When the automatic stay is in place, a creditor cannot take prohibited actions without getting permission from a bankruptcy judge. To get that permission, the creditor has to file a motion with the court called a Motion to Lift the Stay or a Motion for Relief from Stay.
Why Would a Creditor Want to Lift the Automatic Stay?
A creditor might seek to have the stay lifted for several reasons. Sometimes, the action the creditor wants to take has little or nothing to do with the bankruptcy, such as a lawsuit to determine custody of children or to pursue a claim against your insurance if you cause an injury to a person or to property. In other cases, the action has everything to do you with your property—for instance, when you get behind in rent, child support, a car loan, or a mortgage.
If a lawsuit is pending in another court—as with a suit over an automobile accident—either you or your opponent will need to file a motion with the bankruptcy court and explain to the judge why that lawsuit should continue in the other court.
Why Would a Bankruptcy Court Allow a Creditor to Take Action Despite the Automatic Stay?
The Bankruptcy Code does not allow debtors free reign to ignore all debts and obligations. Some obligations survive bankruptcy or continue despite it. A bankruptcy court will often lift the automatic stay in order to allow court cases to continue that will have little or no effect on the bankruptcy or allow creditors to gain possession of collateral when a debtor is not making proper payments, allows insurance to lapse, or otherwise defaults on the terms of a loan.
Lifting an automatic stay is a serious issue, one that the Bankruptcy Code and courts do not take lightly. For that reason, the creditor often has a high hurdle to overcome to prove that the creditor deserves this extraordinary relief and that the creditor cannot get satisfaction any other way.
The Process of Filing the Motion for Relief From Stay
First, understand that creditors generally need an attorney to file the motion for relief from stay. Corporate creditors always need an attorney to file the motion.
The Bankruptcy Code strives to make the motion process efficient for creditors but still fair to debtors. The rules governing bankruptcy cases provide that once a motion is filed, the court has to hold a preliminary hearing on the motion within 30 days. When a creditor is seeking possession of collateral like a car, and believes that the value of the collateral is in jeopardy (when insurance lapses, for instance), the creditor will often ask the court to hold the hearing on an expedited basis.
When the purpose of the motion for relief from stay is to secure collateral, the creditor has to prove that it is entitled to relief from the stay for one of two reasons:
- For "cause," including a lack of adequate protection for property—if the value of the property is declining so much so that the creditor could lose money on the sale of the collateral. Other causes can be a lack of insurance, a failure to pay personal or real property taxes, someone other than the debtor or a family member is driving the car, the property is empty or has been abandoned, or any other issue that could cause a decline in value or place the collateral in jeopardy.
- The debtor does not have equity in the property and the property is not necessary to an effective reorganization. In other words, the creditor has to prove the value of the property and the balance on the account, and prove that the property is not necessary for the debtor to have a successful Chapter 11 or 13 case. Because Chapter 7 does not entail a reorganization as such, this clause does not apply.
You can learn more about removing the automatic stay in particular circumstances when you visit the following articles:
When a Creditor Violates the Automatic Stay
Unfortunately, sometimes a creditor takes an action that violates the stay without first filing a motion with the court. When that happens, the creditor may be subject to penalties, which often include paying damages to the debtor and returning repossessed or foreclosed property. For more, visit Your Rights When a Creditor Violates the Automatic Stay.
How Long Does the Automatic Stay Last?
The automatic stay lasts only as long as the bankruptcy lasts. If the case is dismissed, the automatic stay ceases. In a Chapter 7 case, the stay expires as to collateral on loans 30 days after the date of the meeting of creditors. This only applies to the right of the creditor to take possession of the property. It does not affect the automatic stay as to the debtor personally. See more on the Bankruptcy Statement of Intention.
To learn more about when the stay is effective and when it expires, see How Long Does the Automatic Stay Last?
Updated by Carron Nicks May 2017