A Creditor Challenge to the Automatic Stay

 Posted on February 19, 2018 in Automatic Stay

Filing bankruptcy stops creditors’ collections against you immediately. But sometimes a creditor tries to get permission to collect anyway.

In our last 10 blog posts we’ve been talking about the “automatic stay.” It is one of the most important and immediate benefits of bankruptcy. The automatic stay stops most kinds of creditor attempts to collect their debts against you, your income, and your assets.

We’ve been looking at the relatively few special situations where the automatic stay protection does not apply. (Examples have included certain family court debts and proceedings, and some tax procedures.)

Today we focus in on how creditors can react to bankruptcy’s automatic stay. Creditors can sometimes challenge whether the automatic stay remains in effect or not, or whether conditions apply to its protection.

Creditor Challenges to the Automatic Stay

When you think of “relief” in bankruptcy what comes to mind is relief from your creditors. At the heart of the bankruptcy petition are the words, “I request relief.” (See page 6 just above the signature line of Official Form 101.)

But the meaning of “relief” when used in this phrase, “relief from the automatic stay,” the meaning is very different. This phrase refers a creditor’s “relief” from the protection that the automatic stay gives you. A creditor challenges your right to that protection by asking the bankruptcy court for “relief from the automatic stay” (or simply “relief from stay”).

This might also be referred to as a creditor’s motion to lift the automatic stay injunction.

Most Creditors Don’t Ask for Relief from Stay

Creditors get relief from stay only if they qualify under certain circumstances laid out in the law. (See Section 362(d) of the U.S. Bankruptcy Code about creditor requests for “relief from the stay.”)

So don’t be concerned that all or many of your creditors will try to take this protection away from you.

Most Chapter 7 “straight bankruptcy” cases are completed without ANY creditor trying to do so. They do happen but often don’t change the outcome.

These challenges are more common in a Chapter 13 “adjustment of debts.” That’s because these kinds of case last much longer, and often involve changes to the payment terms of secured debts, resulting in more opportunities for negotiations and legal wrangling. Still this usually only involves one or two creditors. And even in Chapter 13 there are many cases with no such challenges.

Secured Creditors Requesting Relief from Stay

Most creditors which ask for relief from stay do so to get permission to take back collateral. Or often their goal is to put conditions on the automatic stay to encourage you to keep making payments on the collateral-secured debt. Here’s an example.

• You file a Chapter 7 case when you are 2 payments behind on a vehicle loan. You want to keep this vehicle and have said so in your bankruptcy paperwork. Because of your payment history the lender files a motion for relief from the automatic stay. It wants to push you to catch up on those late payments quickly. It also wants court permission to repossess the vehicle if you don’t make those payments or fall behind later. The lender and you and your bankruptcy lawyer enter into negotiations. If necessary the issue goes to the bankruptcy judge for a decision. Usually the result is a negotiated agreement on the terms for catching up and keeping current on the payments. If you don’t comply you would likely quickly lose the automatic stay protection and lose your vehicle. If you comply you keep your vehicle.

Other Creditors Requesting Relief from Stay

Much less common, but sometimes a creditor without a secured debt has reason to ask for relief from stay. Here’s an example.

• You file a Chapter 13 case right after being served with an eviction lawsuit by your residential landlord. The automatic stay stops the eviction. Your Chapter 13 payment plan shows how you will catch up on the unpaid rent payments and keep current thereafter. The landlord wants to proceed with the eviction. Most likely the automatic stay will continue in effect and stop the eviction as long as your payment plan does show how you’ll comply with the rental agreement, and then you in fact do what your plan says you will.