When a Creditor Tries to Lift (Remove) the Automatic Stay

The automatic stay stops most collection efforts during your bankruptcy. But the stay is not absolute – creditors can ask the bankruptcy court to remove the stay, called lifting the automatic stay. If successful, the creditor can continue its collection efforts against you. 

Read on to learn how creditors can lift the stay, when they might ask the court to lift the stay, and more.

What Is the Automatic Stay?

The automatic stay prohibits creditors from collecting from you while your bankruptcy case is proceeding. It takes effect immediately upon filing the bankruptcy case (that’s why it’s called automatic), and it stops (stays) collection action on pre-bankruptcy debts. The intent is to give you a breathing spell from creditor harassment while you develop a plan to reorganize your finances.

The automatic stay is both broad and powerful. Since it only has a few narrow exceptions, creditors must tread very carefully during a bankruptcy case or risk violating the court’s injunction. 

(To learn more about the automatic stay, see the articles in our Bankruptcy’s Automatic Stay area.)

Asking the Court to Remove the Stay: Motions to Lift the Stay

If a creditor wants to continue to collect from the debtor during the bankruptcy, it can seek permission directly from the court to do so, known as “lifting” or getting “relief from” the automatic stay. The creditor must do this by filing a “motion” with the court.

Motions to lift the stay are not as common as one would think. When a creditor files a motion to lift the automatic stay, the debtor is entitled to notice and a hearing. The burden is on the creditor to convince the bankruptcy court that there is a very good reason to lift the stay, and the court is predisposed to continue the bankruptcy protection. For instance, the court will not lift the stay when an unsecured debt will be included in the debtor’s discharge.

When a Court Might Lift the Automatic Stay

Below are some of the situations when a creditor might seek to lift the automatic stay.

Motions by Secured Creditors

Secured creditors are likely to ask the court to remove the stay if you are not making payments or the collateral is not adequately protected. (To learn more about secured debts, see What Is a Secured Debt?) 

Not making payments on a secured debt. Secured creditors often file motions to lift the stay when the debtor is not making payments. Since property used as collateral must be paid for or returned during bankruptcy, the court will normally lift the stay unless the debtor can bring the payments current or show another good reason to deny the motion (for example, the debtor will use one of the available methods for dealing with secured debts in Chapter 7 bankruptcy, or the debtor has provided for payment of the debt in a Chapter 13 repayment plan). For example, if you are behind on your mortgage when you file for Chapter 7 bankruptcy, your mortgage lender is likely to ask the court to lift the stay so it can continue with foreclosure.  

(To learn more about secured debts in Chapter 7, see Secured Debt & Property in Chapter 7 Bankruptcy. For more on the repayment plan, see The Chapter 13 Repayment Plan.)

Lack of adequate protection. A secured creditor may also complain that it is not adequately protected. Lack of adequate protection usually means that there is no insurance on the collateral, or it is likely that the debtor will not make future payments.

A creditor must also prove to the court that it has standing.  In these cases standing usually boils down to showing that the debtor is actually indebted to the creditor seeking the relief. During the recent mortgage crisis, standing has been a sore subject for the banking industry. Some banks have been unable to prove standing as a subsequent creditor on mortgages that were transferred several times and the original notes are now lost.

Motions by Unsecured Creditors

Sometimes unsecured creditors and other parties seek to lift the automatic stay. The court will often grant the request if the unsecured debt will be excluded from the bankruptcy discharge, like child support obligations, spousal support, or criminal restitution. This is especially true when the debtor has filed a Chapter 7 bankruptcy case. Chapter 13 debtors are often able to repay these non-dischargeable debts over three to five years and remain under the protection of the bankruptcy court.
 
A landlord may seek relief in order to evict for non-payment of rent. A bankruptcy debtor’s rent obligation is divided on the bankruptcy filing date into pre-bankruptcy and post-bankruptcy debts. Pre-bankruptcy rents are dischargeable, and post-bankruptcy rents are not dischargeable and not subject to the automatic stay. This means that while the automatic stay would prohibit the landlord from collecting on unpaid pre-bankruptcy rent, the landlord may evict if post-bankruptcy rents are not paid. (To learn more, see Evictions and the Automatic Stay in Bankruptcy.)