Secured Creditors and the Automatic Stay

We discussed yesterday the basic concepts of the automatic stay in a bankruptcy case. The automatic stay stops all debt collection efforts from the onset of the filing of the bankruptcy case. This also includes any efforts by a secured creditor, such as your mortgage or car company, to collect on their debt with you.

In certain situations, including if the debtor is late on payments to their secured creditor or is simply surrendering the property through the bankruptcy itself, the secured creditor can file a motion with the court to seek relief from the automatic stay. This is known less formally as a lifting of the stay. Secured creditors, notwithstanding the automatic stay in the bankruptcy, still have a right to recover their collateral if payments are late or the collateral is being surrendered in the bankruptcy. Yet, because the automatic stay prevents all debt collection efforts, the secured creditor still needs to move for permission from the court to be able to continue its efforts.

In a foreclosure situation, for example, the mortgage company can seek relief from the automatic stay to begin foreclosure proceedings on the home or continue proceedings that had begun prior to the filing of the bankruptcy. In car situations, the auto financing company will seek relief from the stay to repossess the vehicle. For both of these situations in a Chapter 7 bankruptcy, the debtor is not going to be liable for the remaining deficiency once the collateral has been recovered and sold.

Often times, the motion is expected by the bankruptcy attorney and the client prior to the filing of the bankruptcy. The client has indicated that they will surrender the home or vehicle in their bankruptcy petition and want to discharge their obligation on that particular secured loan through the bankruptcy. At that point, the lifting of the stay is the formality that eventually culminates in the recovery of the property by the secured creditor, and the removal of any obligation that the client had when filing the Chapter 7 Bankruptcy.