Lifting the Automatic Stay Frees Creditors to Collect

The automatic stay is a legal mechanism in a bankruptcy case that freezes collection and legal actions against a person owing money. The automatic stay provides breathing room and locks in the status quo while debt issues are settled. However, creditors and others can seek relief from the automatic stay, often on grounds that there is more protection without it.

Find out how and when relief from the automatic stay is obtained, and you can act to protect your property and rights.

Lifting the Automatic Stay and Protection for Creditors and Others

The automatic stay exists to provide protection for people who owe and collect money in a bankruptcy case. The freeze gives breathing space to you and lets the bankruptcy process go to work. No single creditor or others can take property and interfere with the bankruptcy solution in the making.

In some cases, though, for creditors and others, such as a spouse or property co-owner, protecting interests means freedom from the automatic stay. Bankruptcy law recognizes this, and allows a court to grant relief in certain circumstances.

Relief for Cause

The law allows relief from the automatic stay when a creditor or other party can show a compelling reason for lifting the stay. Reasons include:

  • Lack of adequate protection. The creditor shows how its interest is at risk, due to factors such as not enough collateral or equity, or falling property value
  • There is no reason related to the bankruptcy to keep the stay in place. The stay stops all lawsuits against someone who has filed a bankruptcy case. A court can lift the stay to allow unrelated lawsuits to move ahead
  • The automatic stay places some other unjustified burden on a creditor or others interested in the debtor's property

Relief Due to Lack of Equity in Debtor's Property

When there is no value or equity in the debtor's property, and it isn't needed for a reorganization, others with interests in the property should be given relief from the automatic stay.

Only one reason for relief has to be shown to the bankruptcy court, cause or lack of equity.

Eligibility for Relief

Creditors and others can file a motion for relief if the automatic stay causes or may cause an adverse impact on their property, contract rights or legal claims. Relief motions are typically filed by:

  • Lessors
  • Holders of setoff rights
  • Secured creditors, including mortgage holders or lenders
  • Co-owners, consignors and other property holders
  • Persons with non-bankruptcy legal claims against the debtor

When asking the court to lift the automatic stay, a person must show standing, or the legal right to ask for relief. This means a creditor must show a debt and interest in property as collateral. Some creditors can't pass this threshold, such as mortgage lenders that can't locate needed loan documents.

Steps for Relief

The party seeking relief from the automatic stay starts the process by filing a motion for relief. Here is a general description of the steps to take:

  • A creditor or other party files a motion for relief, stating the grounds for relief and a proposed order for the relief it wants the court to grant 
  • The motion is served on the debtor and the bankruptcy trustee
  • The debtor responds to the motion, and can object
  • The court conducts a hearing on the motion, and makes a decision, generally within 30 days

Forms of Relief Available

The court can lift the automatic stay completely or as needed, modify, condition or annul it. The court applies bankruptcy law and equitable principles, meaning what is fair or just, in deciding whether or not to grant relief for cause, and the form of relief granted.

Questions for Your Attorney

  • My business partner just filed for bankruptcy. Can I have the automatic stay lifted with respect to real estate our partnership bought?
  • What are my defenses if I want to object to a motion for relief from the automatic stay in my bankruptcy case?
  • Can someone appeal if they don't agree with the court's decision on a motion for relief?

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