When Can a Creditor Lift (Get Rid Of) the Automatic Stay?

The automatic stay requires creditors to stop collection efforts when the debtor files bankruptcy. For instance, wage garnishments, vehicle repossessions, and home foreclosures must cease. However, a creditor can file a motion asking the court to remove the automatic stay, and if the court grants it, the creditor can resume collection activities.

The Automatic Stay Preserves Property

Most creditors know that if they receive a bankruptcy notice, there's a good chance they won't get paid. The automatic stay helps ensure a fair distribution of assets by preserving property and preventing one creditor from getting the lion's share of assets. Here's how it helps in each chapter.

• In Chapter 7, the automatic stay gives the trustee time to evaluate the available assets, review the creditors' proof of claim forms, and distribute funds according to the priority payment bankruptcy laws.
• In Chapter 13, the automatic stay prevents a creditor from taking assets the debtor would otherwise get to keep. For instance, the debtor gets time to catch up on missed payments and retain valuable assets such as a house or car.

How to Ask to Lift the Automatic Stay

The creditor must file a written motion with the court explaining the need to lift the stay, notify the debtor of the motion and the hearing, and prove that good cause exists to lift the automatic stay. The court will decide whether to grant or deny the creditor's motion. If the court grants the motion, the creditor can resume collection efforts.

When the Court Won't Lift the Stay

The bankruptcy court will deny a motion to lift the stay if the underlying debt would be discharged in the bankruptcy case. For instance, suppose a debtor stops a credit card debt trial by filing for bankruptcy, and the creditor files a motion to lift the stay to proceed with the state court trial. Because the bankruptcy would discharge the credit card balance, the bankruptcy judge would deny the motion.

Similarly, a bankruptcy judge would deny a lender's motion to lift the stay to recover property if the Chapter 7 trustee intended to sell the property for the benefit of creditors and was entitled to do so.

Keep in mind that these are examples only. Most creditors wouldn't file a motion to lift the automatic stay when the outcome is easily predicted.

When the Court Will Lift the Automatic Stay

A bankruptcy judge will likely lift the automatic stay in these situations.

Property Serving as Collateral Won't Bring Money for Creditors

A creditor bringing a motion to lift the automatic stay will likely have secured its debt with collateral, such as a house or a car, and want to sell the collateral because the debtor is:

• behind on home mortgage or auto payments
• unable to maintain insurance
• unable to fund a Chapter 13 repayment plan, or
• someone who wants to surrender the property (according to the bankruptcy schedules).

The creditor will base the motion on the fact the creditor will lose money if required to wait until the bankruptcy case ends to foreclose or repossess. Because the court won't grant the creditor's motion if the property is valuable to the bankruptcy estate, the creditor will also need to prove that the property won't bring money for unsecured creditors and doesn't have enough equity to benefit the bankruptcy estate.

Even though the collateral is part of the bankruptcy estate, not all property is useful in bankruptcy. Here's why.

• In a Chapter 7 case, a trustee won't sell the property unless doing so will net money for creditors. For instance, the trustee must pay off any secured debt, give the debtor the exemption amount, and pay sales costs and fees. Only if funds would remain would the trustee sell the property.
• In a Chapter 13 case, the debtor must have sufficient income to catch up on payments in a three- to five-year repayment plan. If the debtor can't bring the lender current through the plan, the court will likely remove the stay.

A common defense raised by the Chapter 7 trustee would be that the property has sufficient equity to repay the creditor any missed payments and interest after the case ends. Attorneys often refer to this as having an "equity cushion" protecting the lender from financial harm.

It's also possible that a Chapter 7 debtor might argue against the motion and demonstrate an ability to catch up on payments when an equity cushion doesn't exist. However, it would be highly unusual. A Chapter 7 debtor who can afford to pay back car payments ensures the loan is current before filing to avoid the time and costs of defending a motion to lift the automatic stay.

These motions don't usually arise in Chapter 13 cases. Chapter 13 trustees don't sell property for creditors and, therefore, wouldn't have a stake in the motion. Chapter 13 filers address late payments in the proposed Chapter 13 plan, and the bankruptcy judge would handle objections as part of the Chapter 13 confirmation process.

Litigation Won't Affect the Bankruptcy Case

The automatic stay doesn't apply to criminal matters, divorce, and support obligations. Litigation in these situations can proceed without seeking permission from the bankruptcy court because the issue has been predetermined not to affect the bankruptcy case.

However, the potential impact on a bankruptcy case isn't always clear. In such cases, the stay will attach, but the court will lift it if the bankruptcy court doesn't handle the core issue. The bankruptcy court reviews these matters on a case-by-case basis.

• Landlord-tenant issues. Suppose a landlord would like to evict the filer due to non-payment of rent or improper use of the premises, such as drug use. The court would likely lift the stay and allow it to proceed.
• Insurance claims. Suppose a plaintiff is pursuing a personal injury or property claim that's covered by the debtor's auto or homeowner's insurance. The court will likely limit the recovery to the insurance coverage amounts, with anything over that amount discharged in bankruptcy. The court would probably lift the stay and allow it to proceed with the recovery limit condition.

It's not uncommon for a litigant to ask the bankruptcy judge for permission to proceed in an abundance of caution. For instance, a government agency litigating an enforcement proceeding, such as a case to stop a defendant from polluting, might ask the court to lift the stay before continuing the case.

A Fraud Trial Must Determine Dischargeability

Sometimes, a lawsuit must occur before the bankruptcy court can determine the dischargeability of a debt. The classic instance is in a case of alleged bankruptcy fraud. Bankruptcy won't wipe out a debt proven to be incurred through fraud in an adversary proceeding in bankruptcy court.

If a fraud case had started in state court before the bankruptcy filing, a bankruptcy judge would likely lift the stay to allow the case to finish in state court and accept the state court's decision regarding fraud when determining the dischargeability of the debt.

For instance, suppose a creditor accused the debtor of overstating income on a credit application. The case went to trial in state court, but the debtor stopped it by filing for bankruptcy. The bankruptcy court would have jurisdiction over the debt. It would be wiped out in bankruptcy unless the creditor could prove fraud. The creditor must either file a new fraud lawsuit in bankruptcy court or ask the bankruptcy court to allow the state court trial to continue.

The bankruptcy court would likely grant a motion to lift the automatic stay if the parties had already engaged in extensive, costly litigation in state court because it would be unfair to ask the litigants to start over in the bankruptcy court. However, if the matter had been filed recently and discovery hadn't begun, the judge would likely deny the motion and require the fraud trial to proceed in bankruptcy court.

When the Automatic Stay Attaches Partially or Not at All

In certain situations, the automatic stay never applies to the case or does so for only a short time. In particular, this might happen if you filed for bankruptcy the previous year.

• Second bankruptcy filing. If you've filed for bankruptcy once before within a year, the automatic stay will only apply for thirty days.
• Third bankruptcy filing. The automatic stay won't go into effect if it's your third filing within a year.

You can ask the court to order or extend the stay. The court will grant the motion if you show that you filed your current bankruptcy case in good faith. Find out more about multiple bankruptcy filings.