The bankruptcy automatic stay is an enormously broad and powerful legal protection. The stay is a temporary injunction that prohibits creditors from proceeding with collection actions against the debtor during the bankruptcy case. The bankruptcy debtor is entitled to this protection automatically from the moment the case is filed. Creditors are “stayed” (stopped) from collecting until either the bankruptcy court modifies this injunction, or the debtor receives a discharge.
Before a creditor can proceed to collect on a debt, it must receive permission from the bankruptcy court. This process is commonly referred to as “lifting the automatic stay.” A creditor that does not first obtain this permission acts in violation of the bankruptcy court injunction, and may be subject to federal contempt of court charges.
When a “motion to lift stay” is filed, the debtor is entitled to notice and a hearing. A secured creditor will often file this motion if the debtor is not making payments on the loan. The bankruptcy court generally grants these requests when payments are delinquent and there is no equity in the property. Defending this kind of motion is generally a matter of catching the payments up to date.
In cases where the collateral for a loan is not insured, or there is no assurance that future payments will be made, the creditor may complain that it is not “adequately protected.” These are fair concerns that can be overcome with evidence of insurance and/or evidence of future ability to pay.
Recently debtors have had success in defending motion to lift stay filed by mortgage companies. One common defense is that the mortgage company cannot prove that it is the rightful owner of the mortgage, and therefore is not legally entitled to lift the stay (also known as a “lack of standing”). This is especially true when a mortgage has been transferred several times over the years, and the original note has been lost.
Unsecured creditors and other parties at interest can ask the court to lift the stay. These requests are generally denied when the debt will be included in the discharge. On the other hand, the request is likely to be granted when it is excluded from the discharge. Debts commonly excluded from the bankruptcy discharge include child support obligations, spousal support, criminal restitution and fines.
A motion to lift stay is a common event in the bankruptcy courts and is generally very predictable. In many cases your bankruptcy attorney expects the motion and can discuss it with you even before your case is filed.