One of the most important aspects of bankruptcy filing is the automatic stay. We will explore how the automatic stay works for you, as well as the creditors’ option to submit a motion for relief from stay.
How Does the Automatic Stay Work?
As soon as you file for bankruptcy, either Chapter 7 or Chapter 13, the automatic stay goes into effect. The automatic stay keeps creditors from collecting debts during your case. When you or your attorney files, you will include a list of your creditors. These creditors will receive a copy of the automatic stay, which prevents them from taking any debt collection actions against you, such as:
- Calling you
- Sending letters
- Foreclosing your home
- Suing you for a debt
- Filing a garnishment on your earnings
- Continuing a lawsuit
- Collecting on a judgment
The purpose of the automatic stay is to give you some financial relief while you develop a plan for your finances and repayment. It also benefits creditors who might not receive anything because another creditor collects all the assets first. The bankruptcy process attempts to divide payment fairly amongst creditors.
While the automatic stay provides you some much-needed breathing room, creditors still have options. They may ask the court to lift the automatic stay so they can continue collecting. The next part will cover what this means for you.
What is a Motion for Relief from Stay?
Sometimes creditors will motion for relief from stay. Not every creditor will file a motion. Most will be willing to receive payment from the bankruptcy plan. It is also up to the creditor to provide a credible reason for lifting the stay.
Secured Creditors
Secured creditors may try to lift the stay so they can collect on collateral. For example, when you file for Chapter 7 bankruptcy, the mortgage lender may ask the court to lift the stay if you are behind on your payments. By lifting the stay they can continue the foreclosure proceedings. Since you must either pay or return the property under the secured debt, the court will probably lift the stay if you cannot keep up with the payments.
However, the court may deny the motion for relief from stay if the debtor can show the ability to repay the loan with the asset’s equity. By doing so, the debtor demonstrates that the lender is sufficiently protected from financial loss.
Even when a motion comes forward, there is no reason to fight it if you have no intention of keeping the asset.
Unsecured Creditors
It is unlikely that an unsecured creditor will ask to lift the stay. If your Chapter 7 bankruptcy does not discharge a debt, a creditor can motion to lift the stay. However, since Chapter 7 cases usually last only a few months, most creditors are willing to wait until the end of the case to start collecting again.
In the case of Chapter 13 bankruptcy, according to the debtor’s three to five-year plan, unsecured creditors receive repayment for debts that are not discharged. Since they will receive partial or full payment, creditors have little reason to ask for relief from stay.