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

The automatic stay is not absolute – creditors can ask the bankruptcy court to remove the stay, called lifting the automatic stay.

By , Attorney

The automatic stay is an order that goes into place when you file for bankruptcy and stops most collection efforts. But the stay isn't absolute, and a creditor can ask the bankruptcy court to lift the automatic stay and allow collection efforts to resume. If successful, the creditor can continue pursuing its debt.

Find out how an automatic stay stops collection actions and what a creditor must do to lift the stay. Also, learn how a motion to lift the automatic stay will proceed and when the bankruptcy court might let a creditor resume a collection action.



What Happens After Bankruptcy's Automatic Stay Stops a Collection Action

The automatic stay gives you a breathing spell from creditor harassment while you develop a plan to reorganize your finances. It also prevents one creditor from grabbing all available assets while the bankruptcy trustee reviews your finances and ensures that all creditors receive a fair share.

The automatic stay works by going into effect immediately after a bankruptcy filing and "staying" or stopping collection action on many debts incurred before the bankruptcy. Once in place, creditors can't collect during your bankruptcy case.

Exceptions to the Automatic Stay: When It Won't Go Into Effect

Only bankruptcy filers who act in good faith are entitled to the automatic stay's protection from creditors. Filers who use the bankruptcy system to avoid paying creditors or otherwise engage in "bad faith" actions don't receive the benefit.

For instance, the automatic stay will last only 30 days if the debtor filed a bankruptcy case the previous year and won't attach if the debtor filed more than one case the year before. However, a filer can explain why multiple bankruptcy filings were necessary and ask the court to put the automatic stay in place.

The automatic stay also doesn't apply to all collection actions. For example, your ex-spouse will continue to be entitled to spousal or child support payments. However, almost all other recovery actions will stop, including ongoing civil collection lawsuits and wage garnishments.

Finally, a creditor can collect a debt incurred after the bankruptcy filing date, even if the bankruptcy case remains ongoing. For instance, utility and cellphone bills are types of bills you'll likely owe soon after filing.

Example. Suppose you file for Chapter 7 bankruptcy on July 1, 2022, during a record-breaking heatwave, and your air conditioning unit breaks down on July 2, 2022, forcing you to buy a new unit on credit. Because you purchased the unit after your bankruptcy filing date, the charge won't be included in your bankruptcy case, and the creditor can collect if you fail to pay—even if your bankruptcy case is still open.

Learn about utility bills and bankruptcy.

What Is a Motion to Lift the Automatic Stay in Bankruptcy?

Once the automatic stay is in place, a creditor who would like to continue collection efforts must ask the bankruptcy court for permission by filing a motion asking for relief from the automatic stay.

Creditors often file motions to lift the automatic stay when the bankruptcy involves a home foreclosure, car repossession, or eviction. Less frequently, a creditor will seek permission to continue a fraud trial in state court.

Most of these motions occur in Chapter 7 bankruptcy, but creditors can file them in Chapter 13 when the debtor doesn't pay a mortgage or car payment as required by the three- to five-year Chapter 13 repayment plan. Learn more about the Chapter 13 process.

How Does a Motion to Lift the Automatic Stay Work?

Not all creditors will file a motion to lift the stay. But you'll know when it happens because you'll receive paperwork notifying you of a hearing date.

Once you receive the paperwork, you can "oppose" or fight the motion by filing a written response with the court and serving a copy on the creditor. The bankruptcy judge will consider both sides at the hearing and decide whether to grant the creditor's request.

How to Fight a Motion to Lift the Automatic Stay

It's the creditor's "burden of proof" or responsibility to convince the bankruptcy court a valid reason to lift the stay exists. Usually, the bankruptcy judge won't agree to let a creditor collect a debt unless the debt is "nondischargeable" and won't go away in bankruptcy.

For instance, the court wouldn't lift the stay if the creditor's credit card debt would be "erased" or discharged at the end of the case. But the bankruptcy judge might lift the stay to allow the creditor to litigate a fraud action.

The bankruptcy judge will also consider lifting the automatic stay when the creditor has a lien or contract that allows the creditor to recover property, like a car, home or rental unit. In such cases, the judge will look at whether the bankruptcy trustee has an interest in selling the property and whether the creditor will be financially hurt if the stay remains in place.

Keep reading for more details about each of these scenarios.

Lifting the Automatic Stay When Foreclosing or Repossessing Property

If you're behind on your mortgage when you file for Chapter 7 bankruptcy, don't be surprised if your mortgage lender asks the court to lift the stay so the lender can continue foreclosing.

Secured creditors, such as a home or car loan lender, frequently file these motions when the borrower isn't making payments and the property doesn't have an "equity cushion" or enough property equity to cover the loan during the bankruptcy case.

For instance, suppose your home loan balance is $100,000, but the home is worth only $90,000, leaving no equity. The bankruptcy court would likely grant the motion to lift the stay and allow the lender to proceed for two reasons:

  • The trustee couldn't sell the house for the benefit of other creditors because the lien gives the lender the right to receive $100,000. If the trustee sold the house, nothing would remain after the trustee paid the lien.
  • The house is worth less than what's owed and the debtor isn't making payments, so the lender will continue to lose money until the house is sold.

By contrast, the bankruptcy court would likely deny the motion if the debtor or trustee demonstrated that the equity was sufficient to repay the loan and "adequately protect" the lender from financial loss.

For example, suppose the lender was owed $300,000 on a house worth $750,000. Not only would the equity cushion protect the creditor from loss, but the trustee could sell the house, pay off the lender, and use the substantial proceeds to pay other creditors—possibly even returning some funds to the debtor.

The bankruptcy court might also deny the motion if the debtor could bring the monthly loan payments current. In such cases, the property's available equity wouldn't matter. The more challenging aspect would be proving to the court that the debtor had money that wasn't already a part of the bankruptcy estate, although it's not impossible. Such funds usually come from after filing earnings or a loan from a friend or family.

From a practical standpoint, a filer facing a property loss due to payment arrearages might want to consider converting the Chapter 7 case to Chapter 13. Unlike Chapter 7, Chapter 13 has a mechanism that allows filers to catch up on overdue payments and keep property.

However, filers shouldn't use this tactic as a stalling technique. If not converted in good faith, or with a reasonable ability to catch up on payments, the bankruptcy court might view conversion as a bad faith strategy or even worse, an attempt to defraud the creditor.

Learn more about secured debt and property in Chapter 7 bankruptcy.

Lifting the Automatic Stay to Litigate Fraud

It's unusual for an "unsecured" creditor, or a creditor without a property interest, to file a motion to lift the automatic stay. However, it can happen when the debtor's bankruptcy filing stops an ongoing fraud trial in state court.

In that case, the bankruptcy court would need to know the lawsuit's outcome. Why? Because the debt won't be dischargeable if the creditor proves the debtor committed fraud.

Even though the litigants could refile the case in bankruptcy court, lawsuits are expensive, and it can be unfair to ask the litigants to incur the costs associated with starting over. So many bankruptcy court judges will allow the case to move forward in state court and adopt the outcome.

Lifting the Automatic Stay to Pursue Eviction

A landlord who wants to start an eviction, or whose eviction action came to a halt after the bankruptcy filing, might ask for relief from stay to move forward with eviction proceedings.

Residents in a few states can prevent the motion by paying what's owed early in the case. If you have this right, you'll list the law that gives it to you when completing your bankruptcy paperwork and filing proof of payment. However, most filers won't have this option.

In most cases, the bankruptcy court will grant the landlord's motion and lift the automatic stay, thereby allowing the landlord to proceed with eviction. Find more information about evictions and the automatic stay in bankruptcy.

Talk With a Bankruptcy Lawyer

Most filers find that a bankruptcy attorney is in the best position to help them determine how to proceed after receiving a creditor's motion to lift the automatic stay. Find out more about what happens in bankruptcy court.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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