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Archive for the ‘relief from automatic stay’ tag

Two More Creditor Challenges to the Automatic Stay

February 23rd, 2018 at 8:00 am

A creditor might want to pay a claim through your insurance, or finish a lawsuit to establish that you got the debt through fraud.  

 

“Relief from the Automatic Stay”

Our last blog post got into some reasons that creditors ask for “relief from stay” other than to repossess collateral.

The “automatic stay” is one of the biggest benefits you get for filing bankruptcy. It “stays”—legally stops—virtually all creditor collection actions right away when you file a bankruptcy case. The automatic stay protects you, your assets, and your income from creditors. It does so permanently in many circumstances.

But there are exceptions, when creditors can ask for permission to pursue a debt, and may get that permission.  So it’s important to know the circumstances in which a creditor would be able to get “relief from stay.”

Last time we explained two of those circumstances, allowing a creditor to finish a legal proceeding against you to determine whether you are liable on a debt, and if so how much you owe. Now here are two other circumstances where creditors may get “relief from stay.”

1. Getting Paid Insurance Proceeds  

When you file bankruptcy you get protection from creditors to which you are personally liable on a debt. But what if your liability is completely covered by insurance, such as with a vehicle accident? Or what if insurance would at least partially cover the amount of your liability?  

The money to pay the claim is not coming from your pocket but that of your insurance company. Should your bankruptcy filing affect your insurance company’s obligation to pay your liability up to the coverage limits?  Arguably not. An injured person may understandably believe your insurance company should pay your liability regardless of your bankruptcy filing.

But the person allegedly damaged by you can’t pursue you, your assets, or your income because of the automatic stay. However, he or she could file a motion asking the bankruptcy court for permission to pursue ONLY the insurance proceeds. The motion would make clear that the debt would be pursued only against your insurance coverage.  Assuming that the court would agree, it would sign an order granting “relief from stay” for the person to go after your insurance proceeds, but not against you in any other way.

Note that your insurance company likely has a “duty to defend” you in such a situation. So the insurance company and the allegedly damaged person, or their respective lawyers, would likely negotiate the matter. Most likely there would be no lawsuit. Or, if there would be one it would get settled and not go to trial. In the unlikely event that it would go to trial, your insurance company would pay to defend the lawsuit, and would pay out any damages up to the coverage limit. Any damages beyond coverage limits would very likely be written off—discharged in bankruptcy.

2. Determining Dischargeability of the Debt

Most types of debts can be discharged in bankruptcy. But there are quite a few exceptions. Some examples of exceptions are criminal debts, unpaid spousal and child support, recent income taxes, and many student loans. See Subsections 523(a)(1),(5),(8), (13), and (15) of the U.S. Bankruptcy Code.

But more conventional debts may also not get discharged based on how you incurred them. A debt incurred through fraud or misrepresentation usually can’t be discharged. See Subsections 523(a)(2) and (4) of the Bankruptcy Code. However, unlike the above exceptions of criminal and support debt, fraud-based debt IS discharged unless the creditor proves the fraud. Then if the creditor would allege fraud, you’d have the opportunity to dispute it.

The bankruptcy court usually decides such fraud-related disputes. But what if at the time of your bankruptcy filing there’s already a state court lawsuit addressing that question?

Just as with the insurance-based circumstance above, your bankruptcy filing would stop that lawsuit from proceeding. But then the creditor could ask for relief from stay to allow the lawsuit to go ahead.

The bankruptcy court might allow the state court to finish deciding whether the debt was incurred through fraud. Or the bankruptcy court might want to decide that issue itself.  Likely it would focus is which court would be more efficient than deciding this issue. And that would likely turn mostly on whether the state court was actually deciding the fraud issue (and not just whether you were merely liable in the debt) and on how close the state court was to a resolution.

 

A Creditor’s Challenge to the Automatic Stay to Pursue a Lawsuit

February 21st, 2018 at 8:00 am

A creditor may ask the bankruptcy court to let another court finish a lawsuit about liability and/or the amount of damages. 

 

“Relief from the Automatic Stay”

Our last blog post was about the possibility of a creditor asking for “relief from the automatic stay.” The automatic stay refers to the immediate protection you receive from debt collection as soon as you file bankruptcy. (See Section 362 of the U.S. Bankruptcy Code about the “Automatic stay.”)

So, a creditor’s motion for “relief” from that protection refers to a creditor’s request to the bankruptcy court for permission to pursue a debt in spite of your bankruptcy filing. In certain circumstances a creditor may have legal grounds to ask for an exception to the automatic stay protection. (See Section 362(d) of the Bankruptcy Code about “relief from the stay.”)

Last time we focused on the most common situations in which creditors ask for “relief from the automatic stay.” That’s when a creditor wants to pursue the collateral securing the debt. For example, it wants to repossess your vehicle or foreclose on your home because you aren’t current on monthly payments. Once you file bankruptcy creditors can’t take such actions until asking for and getting “relief from stay” from bankruptcy court.

Relief for Creditor for Reasons Other than Pursuing Collateral

However, there are other reasons for creditors to ask for relief from stay. The automatic stay covers more than the protection of collateral from your creditors. It also stops most lawsuits against you to collect a debt. In most cases your bankruptcy filing will permanently stop that lawsuit. But sometimes, under limited circumstances, a creditor which has sued you may ask for bankruptcy court permission to finish that lawsuit.

 We cover two of these limited circumstances today (and the rest in our next blog post).

Reasons to Ask for Relief from Stay to Finish a Lawsuit

A creditor might ask to finish a lawsuit in order to determine:

  1. whether you are at all liable on a debt—liability
  2. if you are liable on a debt, the amount you owe—the damages

1. Determining Liability Outside of Bankruptcy Court

Someone or some business may think you owe something to it, but you dispute that you do. You don’t think you owe anything. You think you have no liability at all.

If this dispute about liability is already being addressed in a lawsuit when you file your bankruptcy case, sometimes it makes sense to finish determining liability in that lawsuit. Your bankruptcy filing would almost always stop that lawsuit. The creditor would have to get the bankruptcy court’s permission to continue the lawsuit to determine whether you were liable.

For example, you may dispute any liability on a large credit card debt run up by your ex-spouse without your knowledge. If the cred card company sues you to collect the debt, you may be able to establish in that lawsuit that you owe nothing on that debt. The creditor may believe that you are liable and wants to determine that through the lawsuit. It may file a motion for relief from stay to do so in spite of your bankruptcy filing. (It would more likely do so if it could get money out of your bankruptcy case. That could happen in an asset Chapter 7 case or in a Chapter 13 case paying unsecured debts.)

2. Determining the Amount of a Claim

You may instead be in a lawsuit in which you admit that you owe something but dispute the amount owed. The creditor may ask for relief from stay to finish the lawsuit in order to determine the amount you owe.

For example, you were in an accident in which you admit some liability but dispute the amount of damages. You admit that you were at least partially at fault but dispute the damages you caused and their dollar amounts. In this situation the creditor may ask the bankruptcy court for relief from stay to finish the pending lawsuit to determine the amount of damages for which you are liable.

As in the situation above, the creditor would not bother asking for relief from stay if the debt is simply going to get discharged (written off) with nothing paid to it no matter how large the debt. It’s only worth pursuing the matter if the creditor can anticipate getting paid something. Again, this would be much more likely in an asset Chapter 7 case or a Chapter 13 case paying general unsecured debts.

Will the Creditor Get Relief from the Stay?

In both of these situations, the bankruptcy court may or may not grant relief from stay to finish the lawsuit.  It mostly depends on which court could more efficiently finish resolving the dispute—the original court or the bankruptcy court. If the liability or damages dispute has come close to being litigated in the original court, the bankruptcy court may just let the first court finish the lawsuit. That’s also more likely if that court has more experience dealing with those kinds of cases than a bankruptcy court. That’s often the situation. But it a lawsuit has just started, and the dispute is one that the bankruptcy court is experienced in handling, it may not give relief to the creditor but instead resolve the liability or damages dispute itself.

 

A Creditor Challenge to the Automatic Stay

February 19th, 2018 at 8:00 am

Filing bankruptcy stops creditors’ collections against you immediately. But sometimes a creditor tries to get permission to collect anyway. 

 

In our last 10 blog posts we’ve been talking about the “automatic stay.” It is one of the most important and immediate benefits of bankruptcy. The automatic stay stops most kinds of creditor attempts to collect their debts against you, your income, and your assets.

We’ve been looking at the relatively few special situations where the automatic stay protection does not apply. (Examples have included certain family court debts and proceedings, and some tax procedures.)

Today we focus in on how creditors can react to bankruptcy’s automatic stay. Creditors can sometimes challenge whether the automatic stay remains in effect or not, or whether conditions apply to its protection.

Creditor Challenges to the Automatic Stay

When you think of “relief” in bankruptcy what comes to mind is relief from your creditors. At the heart of the bankruptcy petition are the words, “I request relief.” (See page 6 just above the signature line of Official Form 101.)

But the meaning of “relief” when used in this phrase, “relief from the automatic stay,” the meaning is very different. This phrase refers a creditor’s “relief” from the protection that the automatic stay gives you. A creditor challenges your right to that protection by asking the bankruptcy court for “relief from the automatic stay” (or simply “relief from stay”).  

This might also be referred to as a creditor’s motion to lift the automatic stay injunction.

Most Creditors Don’t Ask for Relief from Stay

Creditors get relief from stay only if they qualify under certain circumstances laid out in the law. (See Section 362(d) of the U.S. Bankruptcy Code about creditor requests for “relief from the stay.”)

So don’t be concerned that all or many of your creditors will try to take this protection away from you.

Most Chapter 7 “straight bankruptcy” cases are completed without ANY creditor trying to do so. They do happen but often don’t change the outcome.

These challenges are more common in a Chapter 13 “adjustment of debts.” That’s because these kinds of case last much longer, and often involve changes to the payment terms of secured debts, resulting in more opportunities for negotiations and legal wrangling. Still this usually only involves one or two creditors. And even in Chapter 13 there are many cases with no such challenges.

Secured Creditors Requesting Relief from Stay

Most creditors which ask for relief from stay do so to get permission to take back collateral. Or often their goal is to put conditions on the automatic stay to encourage you to keep making payments on the collateral-secured debt. Here’s an example.

  • You file a Chapter 7 case when you are 2 payments behind on a vehicle loan. You want to keep this vehicle and have said so in your bankruptcy paperwork. Because of your payment history the lender files a motion for relief from the automatic stay. It wants to push you to catch up on those late payments quickly. It also wants court permission to repossess the vehicle if you don’t make those payments or fall behind later. The lender and you and your bankruptcy lawyer enter into negotiations. If necessary the issue goes to the bankruptcy judge for a decision. Usually the result is a negotiated agreement on the terms for catching up and keeping current on the payments. If you don’t comply you would likely quickly lose the automatic stay protection and lose your vehicle. If you comply you keep your vehicle.

Other Creditors Requesting Relief from Stay

Much less common, but sometimes a creditor without a secured debt has reason to ask for relief from stay. Here’s an example.

  • You file a Chapter 13 case right after being served with an eviction lawsuit by your residential landlord. The automatic stay stops the eviction. Your Chapter 13 payment plan shows how you will catch up on the unpaid rent payments and keep current thereafter. The landlord wants to proceed with the eviction. Most likely the automatic stay will continue in effect and stop the eviction as long as your payment plan does show how you’ll comply with the rental agreement, and then you in fact do what your plan says you will.  

 

The Residential Lease Exception to the Automatic Stay

October 26th, 2016 at 7:00 am

Filing bankruptcy can stop an eviction, unless the landlord has already gotten a judgment of possession. Don’t wait—timing is crucial.

 

 

The “automatic stay” prevents a creditor from taking collection action against you once you file a bankruptcy case. This applies to a landlord to whom you’re behind on rent payments. In particular it can apply to preventing a landlord from removing you out of a residential rental. But there are special rules about this in the form of a limited exception to the automatic stay.

Protecting Your Possession of Your Rental Residence

The automatic stay forbids your creditors from taking any of a list of actions against you and your property. One of the kinds of forbidden actions on that list is “to obtain possession of [your] property” or “to exercise control over [your] property.” (See Section 362(a)(3) of the United States Bankruptcy Code.)

Your “property” doesn’t just include the tangible objects that you own. The term is much broader than that. It includes “all legal and equitable interests… in property as of the commencement of the [bankruptcy] case.” (Section 541(a)(1) of the Bankruptcy Code.)

That includes “leasehold” interests—your right to “possess,” or occupy, your rental property. The automatic stay stops your landlord from taking away your right to your rental, for a period of time anyway.

Timing Is Crucial

But you must still have that right to possess at the point in time that you file your bankruptcy. A key phrase in the statute just quoted above refers to protecting the property that’s yours “as of the commencement of the [bankruptcy] case.” You must have a right to possess your rental at the moment you file your bankruptcy case.

When Do You Lose Your Right to Possession?

Each state has different procedures about how a residential lease is terminated. They have different laws about when tenants lose their right to be in the residence. Those different state laws can make it difficult to determine when precisely the tenant loses the right to possession. So it can be hard to tell when the automatic stay would and would not stop a landlord from evicting a tenant.

The exception to the automatic stay about residential leases tries to clear this up.  

It says that an eviction is NOT stopped if the landlord “has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.” (Section 362(b)(22).)

So if your landlord has taken legal action to remove you from rental premises and has NOT yet gotten a judgment for possession of the premises, your bankruptcy filing will stop that proceeding and will stop the landlord from removing you. If that judgment for possession has been entered in favor of the landlord, then it’s too late for bankruptcy to stop the eviction.

A Possibly Helpful Exception to the Exception

However, the Bankruptcy Code provides a procedure which, if you follow rigorously, might enable you to still beat an eviction. You and your bankruptcy lawyer must file, with your initial petition, a certification stating the following.

  • Under state law you are “permitted to cure the entire monetary default that gave rise to the judgment of possession.”
  • Your state’s law allows that cure even AFTER the landlord received a “judgment for possession.”
  • You certify that you have in fact “deposited with the [bankruptcy] clerk” any rent due, including up through 30 days after filing the case.

As long as the landlord does not object, the automatic stay applies and you can stay in the rental.

If your landlord objects, the bankruptcy court holds a hearing within 10 days to determine whether the objection is valid. If the court upholds the objection, the landlord can immediately proceed with the eviction. If the court rules in your favor—that the state law allows for curing the default and you have in fact paid what is required—then you can stay in the rental. (Section 362(l)(1-4).)

“Adequate Protection”

October 17th, 2016 at 7:00 am

To keep possession of your property that is collateral on a secured debt, you need to give the creditor “adequate protection.”

 

The Balancing of the Interests of Creditors and Debtors

Bankruptcy law attempts to balance the interests of debtors and creditors. That’s true as to how the law deals with debtors’ and creditors’ opposing interests as to the collateral on secured debts.

For example, once you file bankruptcy what does the law require you to do in order to keep your vehicle if you are behind on its payments and the creditor wants to repossess it? Or if you are many months behind on your home mortgage, how long do you have to catch up?

The “Automatic Stay” and “Adequate Protection”

In the balancing of the interests of debtors and creditors in these situations, both get certain kinds of protections. One major type of protection debtors receive is the “automatic stay.” That’s the part of bankruptcy law which stops a creditor from repossessing or foreclosing any collateral. It kicks in the moment you file a bankruptcy case. (See Section 362(a) of the U.S. Bankruptcy Code.)

“Adequate protection” relates to what you must do to be able to keep your vehicle or other property long-term. It’s the creditor that’s entitled to “adequate protection.” The term refers to conditions you must meet to keep the automatic stay in effect. To keep protecting your property through the automatic stay, you must provide “adequate protection” to the creditor. (See Section 361 of the U.S. Bankruptcy Code.)

These two protections are designed to balance out each other.

Why the Creditor is Entitled to “Adequate Protection”

One of the main principles of bankruptcy law is that debtors and creditors deserve to have their property rights respected. When it comes to secured debts, the original contract gave you a conditional right to possession of the collateral. You could keep possession as long as you made payments when due and kept up the insurance.

But that contract gives the creditor the right to repossess or foreclose if you don’t make payments on time. If you prevent the creditor from taking possession of the collateral by filing bankruptcy, you still have to satisfy its property rights. You do so by providing the creditor “adequate protection.”

What “Adequate Protection” Requires

The Bankruptcy Code says that “adequate protection… of an interest of [a creditor] in property” is “provided by… mak[ing]…  periodic cash payments to [the creditor] to the extent that the [automatic] stay… results in a decrease in the value of such [creditor’s] interest in such property.” Section 361(a).

What this means is that to maintain the automatic stay and keep collateral you just need to:

  • pay the creditor periodic (usually monthly) payments
  • in an amount large enough to at least offset any reduction of the creditor’s interest in the property while you keep the property

Payments to Offset the Decrease in the Value of Creditor’s Interest in the Property

This simply means that the payments need to be large enough to make up for depreciation of the collateral while you continue in possession of it.

For example, a vehicle loses value through the passage of time and you using the vehicle. Let’s assume that a $10,000 used vehicle is expected to depreciate by $1,200 to $8,800 in one year. That’s $100 per month. To provide adequate protection you would have to pay the creditor at least $100 per month.

Besides depreciation, owning and driving a vehicle creates a risk that it could be damaged or destroyed in an accident. There is also a risk it could be stolen. The creditor is entitled to protection from these potentially sudden decreases in the value of its collateral. So besides the $100 per month, adequate protection requires you to maintain insurance on the vehicle.

Adequate Protection Is Just One Requirement

Maintaining your adequate protection obligation to the creditor allows you to tread water. But most likely you don’t want to stay still but rather get ahead! You want to pay off your vehicle loan under a Chapter 7 “reaffirmation.” Or maybe you can get clean title to the vehicle for less in a Chapter 13 “cramdown.”

Meeting the adequate protection requirement enables you to keep the automatic stay protection intact.  But there’s a lot more to dealing favorably with your secured debts in bankruptcy. Our next few blog posts will get into terms pertaining to secured debts, such as “reaffirmation” and “cramdown,” and lots more.

 

Creditors Ask for Relief from Stay

October 14th, 2016 at 7:00 am

A creditor might want to pursue your co-debtor, protect itself from violating the stay, or take some other action other than collect money.

 

So far we’ve covered four reasons why creditors ask for “relief from stay” other than for permission to repossess collateral.  Creditors seek permission to finish a lawsuit or other legal proceeding to determine:

  1. whether you owe any debt or a claim to the creditor
  2. the amount of that debt or claim, assuming you agree that owe something
  3. whether you owe a debt that can be paid by insurance
  4. whether a debt you owe can be discharged (written off) in bankruptcy     

Today we’ll cover three more reasons that a creditor may ask the bankruptcy court for “relief from stay”:

  1. to get a court determination whether the creditor’s intended actions would violate the automatic stay
  2. to get relief from the co-debtor stay, to pursue someone else liable on your debt
  3. to get permission for taking some other action not involving payment

1. To Find Out If Creditor Would Violate the Automatic Stay

It’s not always clear whether or not a certain action by a creditor would violate the automatic stay or not. There are potentially serious penalties for a creditor if it does violate this law. So a creditor may file a motion for relief from stay to put the issue before the bankruptcy court. The creditor does not take its proposed action until getting the court’s determination that it is acting legally.

The U.S. Bankruptcy Code Section about the automatic stay is complicated. It contains 8 subsections describing the kinds of collection actions that your filing of bankruptcy stays, or stops. It contains 28 exceptions, creditor actions that the automatic stay does not stop.

So a creditor may file a motion for relief from stay as a precaution. It wants to make sure it can take the action that it wants to take.

You can simply not respond if you don’t object, and the creditor gets the bankruptcy court’s validation that it wanted.

Or if you do object, you respond through your bankruptcy lawyer to the creditor’s motion for relief. The court then decides whether the creditor’s proposed action would be a violation of the automatic stay. And if it would be, the court usually also decides whether the circumstances nevertheless entitle the creditor to get relief from the stay.

2. The Co-Debtor Stay

If you and someone else are both fully liable on a debt, your filing of a Chapter 7 “straight bankruptcy” case usually does NOT provide any automatic stay protection preventing debt collection against that other person. The creditor can pursue its legal rights against that other person as if you hadn’t filed bankruptcy.

However, your filing of a Chapter 13 “adjustment of debts” DOES impose a “co-debtor” stay. Creditors are prevented from pursuing the other person(s) liable on your consumer debts, within certain circumstances. So if you file a Chapter 13 case, creditors who want to pursue your co-debtor have to first file a motion in court asking for relief from the co-debtor stay.

3. Permission for Other Action Unrelated to Paying the Debt

When you have a contract with a creditor, you often have contractual obligations not directly related to paying the debt.

The rental of a residential or commercial premise is one good example. If you owe back rent, the creditor/landlord is of course interested in getting paid. But it may be just as interested in getting you out of the residence or business premises so that it can rent it to another tenant. So the creditor/landlord could file a motion for relief from stay to get permission to evict you. But that motion would usually not ask for permission to collect the back rent. That’s because the monetary obligation is being dealt within the bankruptcy process along with your other debts.

(There are special rules about the automatic stay involving residential rentals. So be sure to discuss this with your bankruptcy lawyer if it pertains to you. See Section 362(b)(22 and 23) of the Bankruptcy Code.)

 

Reasons Creditors Ask for Relief from the Automatic Stay

October 12th, 2016 at 7:00 am

A creditor might ask to pursue an insurance-paid claim or to finish a lawsuit determining if you incurred the debt through fraud.


Our last blog post introduced reasons why creditors ask for “relief from stay” other than for permission to repossess collateral.

The “automatic stay” is one of the biggest benefits to filing bankruptcy. It “stays”—legally stops—virtually all creditors’ collection actions immediately when you file bankruptcy. The automatic stay protects you from creditor lawsuits, garnishments, phone calls, repossessions, etc., and does so permanently under most circumstances. So it’s important to know the circumstances under which a creditor would have grounds to ask for “relief from stay.”

Last time we explained two of those circumstances, to allow a creditor to finish a legal proceeding against you to determine:

  1. whether you owe a debt or a claim at all
  2. the amount of that debt or claim, assuming you agree that owe something

Although the bankruptcy court can and often does determine these two things, it sometimes allows them to be determined by another court if doing so would overall be more efficient. The bankruptcy court would then give the creditor “relief from stay” to be allowed to continue the lawsuit or proceeding.

Here are two other circumstances where creditors may get “relief from stay.”

3. Pursuing Insurance Proceeds  

When you file bankruptcy you are seeking protection from creditors which claim that you are personally liable on your debt. But what if you have insurance coverage that would pay all your personal liability on a debt? Or what if that coverage would pay at least part of your debt?

In this situation a creditor might ask for relief from stay to pursue its debt or claim against you ONLY as far as it’s covered by insurance. It would not ask to pursue you at all beyond what it would get from your insurance. The creditor is only asking for permission to require your insurance company to pay what it’s contractually obligated to pay. As long as you would not have to pay anything out of your own pocket, the bankruptcy court may give relief from stay to stay allowing the creditor to pursue the claim against you limited to the insurance money. 

4. To Determine Dischargeability of the Debt

Some types of debts can’t be discharged in bankruptcy. Often it’s straightforward whether a particular debt can or can’t be. For example, a debt that’s clearly for child support is simply never discharged.

But other debts may be less clear about whether they can be discharged. For example, a debt based on fraud or misrepresentation usually can’t be discharged. But if a creditor raised this issue, you could certainly strongly dispute that you engaged in any fraud or misrepresentation. A court would have to resolve this dispute.

These kinds of disputes are usually resolved by the bankruptcy court (if and only if a creditor raises the challenge). But if at the time of your bankruptcy filing that issue is already being addressed in a state court lawsuit, the creditor may ask relief from stay to allow the lawsuit to proceed. The bankruptcy court may decide to allow the state court to finish deciding the matter. The key consideration is whether that would be faster and more efficient than starting all over with the bankruptcy court.

 

Creditors Asking for Relief from Stay NOT to Pursue Collateral

October 10th, 2016 at 7:00 am

Creditors sometimes have good reasons to ask for permission to finish resolving an ongoing dispute outside of bankruptcy court.

 

In our last blog post we talked about the possibility of creditors asking for “relief from the automatic stay.” This phrase refers to a creditor asking the bankruptcy court for permission to pursue a debt or claim in spite of your bankruptcy filing. The “automatic stay” stops creditors from taking collection action against you immediately upon your bankruptcy filing.  In certain limited circumstances a creditor may have legal grounds to ask for an exception to be made to that automatic stay protection.

We referred last time to what is probably the most common situation in which creditors ask for “relief from the automatic stay.” That’s when creditors want to assert their rights against the collateral securing the debt. For example, they want to repossess a vehicle or start a home foreclosure because you aren’t making the monthly payments. They can’t take such action until asking for and getting “relief from stay” from the bankruptcy court.

But there are other reasons—other than to pursue collateral—that creditors ask for “relief from stay.” We’ll cover two of these reasons today, and the rest in our next blog post.

The first two reasons a creditor might ask for relief from stay are to finish a legal proceeding to determine:

  1. whether you are liable on the debt or claim at all
  2. if you are liable for some amount, determining that amount

1. Determining Liability Outside of Bankruptcy Court

Somebody may think you owe money to him or her, but you dispute that claim. You dispute that you owe anything, that you have ANY liability. If that dispute is already being addressed in a lawsuit or in some other forum at the time you file your bankruptcy case, sometimes it makes sense to finish resolving it there. The creditor would have to ask the bankruptcy court for permission to do so.

For example, if your ex-spouse ran up some major credit card charges on a card that had had a $0 balance, you may dispute that you are personally liable on that debt at all. If the cred card company sues you to collect the debt, you may be able to defend that lawsuit on the basis that your ex-spouse owed the debt and you do not.

Such a lawsuit or other proceeding would be stopped by the bankruptcy filing and that would be the end of it. That’s because usually any claim against you would be discharged—legally written off—in the bankruptcy case. The creditor or claimant would receive nothing regardless whether the disputed claim had legal merit or not.

It only makes sense for the creditor to ask for relief from stay to finish the lawsuit if it would financially benefit from doing so. That would happen in two circumstances. If your Chapter 7 case is a rare high-asset-distributing case, your bankruptcy trustee may pay the creditor something on its claim. Or some Chapter 13 cases pay out a large percent to the creditors, making the creditor’s efforts to finish the lawsuit possibly worthwhile.

Otherwise the claimant would receive nothing or very little out of your bankruptcy case. Most claimants know better than to waste their money and their effort by pushing the lawsuit further.

2. Determining the Amount of a Claim

You may be in an ongoing lawsuit in which you admit that you owe some money but the amount is in dispute. The creditor may ask for relief from stay to finish determining the amount you owe in that lawsuit.

For example, you may have been in an accident in which you admit that you were at least partially at fault but there are disputes about what damages you caused and their dollar amounts.

Similar to the first situation above, the creditor may get no benefit from finishing the proceeding. It may make no difference how much you owe. If the debt is going to be discharged completely, without any payment, there’s no point to finishing the lawsuit. So, a creditor would ask for relief from stay to finish determining the amount of the claim only if it would affect how much the creditor will receive.

Again, that would usually be only in the types of Chapter 7 and Chapter 13 cases mentioned above. Otherwise there’s little or no benefit to getting a court determination of the amount you owe.

In both of the above two situations, the bankruptcy court may or may not grant “relief from stay” to finish the lawsuit.  It mostly depends on which court would more efficiently finish resolving the dispute—the original court or the bankruptcy court. 

 

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