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

Some collection actions are not stopped by bankruptcy's automatic stay. And sometimes a creditor can successfully ask the judge to lift (remove) the stay by filing a motion.

The automatic stay requires creditors to stop collection efforts when the debtor files a bankruptcy case. For instance, a wage garnishment, vehicle repossession, or home foreclosure must cease. A creditor can file a motion asking the court to remove the automatic stay, however. The creditor can resume collection activities if the court grants the motion.

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. The burden is on the creditor to prove that good cause exists to lift the automatic stay. The creditor must also provide the debtor with notice of the motion and the hearing on the matter.

The court will decide whether to grant or deny the creditor’s motion. If the court denies the motion, the stay will remain in place. If the court grants the motion, the creditor can resume collection efforts.

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 it's debt with collateral, such as a house 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).

    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 would have to 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.

    Therefore, a creditor who can prove that the property won't bring money for unsecured creditors will likely win a motion to lift the automatic stay. The creditor will argue that:

    • the property doesn’t have enough equity to benefit to the bankruptcy estate
    • the creditor isn’t receiving contract payments, and
    • the creditor will lose money if required to wait until the bankruptcy case ends to foreclose or repossess the property.

    A common defense raised by the trustee or debtor would be that the property has sufficient equity to repay the creditor in full after the case ends. Attorneys often refer to this as having an “equity cushion.” A debtor might also show an ability to catch up on payments if an equity cushion doesn’t exist.

    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 move forward without seeking permission from the bankruptcy court. It has already been decided that it doesn't affect the bankruptcy case.

    In some situations, it isn't as clear. The stay will attach, but the court will lift the stay if the core issue isn't handled in the bankruptcy court. These types of matters get reviewed 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—anything over that amount would be 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.

    When a Creditor Can’t Lift the Automatic Stay

    Here are a couple of situations in which a motion to lift the stay will likely be denied.

    Debt Dischargeability Will Be Decided in the Bankruptcy Case

    Suppose a debtor stops a credit card debt trial by filing for bankruptcy. If the creditor tried to lift the stay to proceed with the state court trial, the bankruptcy judge would likely deny the motion. Why? Because bankruptcy discharges credit card balances and the debt would get wiped out in the bankruptcy case. There would be no need to proceed with the trial. Keep in mind that most creditors wouldn’t bother to file a motion to lift the automatic stay in this instance.

    A Trial Must Determine Dischargeability

    Here’s a bit of a twist, however. 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.

    However, suppose that 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 creditor, who wants to continue the state court trial, brings a motion to lift the automatic stay.

    Once again, the bankruptcy court has jurisdiction over the debt. It will get wiped out in bankruptcy unless the creditor can prove fraud. In the usual case, the bankruptcy court would likely deny the motion to lift the automatic stay. Here's where the twist comes in, however.

    In this example, the parties have engaged in extensive and costly litigation. Because it would be unfair to ask the litigants to start over in the bankruptcy court, the judge would likely approve the motion. The judge would allow the case to finish in state court—even though the outcome would affect the bankruptcy case. The bankruptcy court would then accept the state court’s decision regarding fraud when determining the dischargeability of the debt.

    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 have filed for bankruptcy in 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.

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