When you file for Chapter 7 bankruptcy, an automatic stay is put in place. This is the legal mechanism that stops foreclosure, repossession and collection efforts including wage garnishments. This can be a great relief for you. You can take a breath and work on reorganizing your priorities and assets.
However, under certain circumstances, creditors can ask the court to allow them to go ahead with collections in spite of the bankruptcy filing. This is called a Motion for Relief from Automatic Stay, and a successful one often negates the whole purpose of filing for Chapter 7 bankruptcy in the first place.
These motions are most often filed by mortgage companies and car loan lenders, but any creditor can file a Motion for Relief if they have a compelling reason to resume collection efforts before your Chapter 7 bankruptcy case is otherwise completed.
The Court may grant creditors relief from the stay if they can produce evidence that you will be putting their collateral at risk or that you are unable to continue satisfactory payments on the collateral. If you defaulted on your mortgage seem unable to cure past due payments or continue making payments, the mortgage company may decide to file a Motion for Relief from the Automatic Stay. Automobile lenders who feel you are putting the vehicle at risk, such as failing to maintain insurance coverage or purposely putting the vehicle at risk of damage, would file for relief in order to repossess the car and protect their collateral.
In a Chapter 7 bankruptcy, the creditor typically wants to be sure that it will get full value for the asset when the repossess it. The major concern is that you’re holding onto a car (for example) and not paying for it – if you crack it up during the Chapter 7 bankruptcy process then the bank is going to get stuck with a worthless car and you’re going to walk away from the debt once the discharge is issued.
The motion for relief, therefore, is the creditor’s way of getting things moving forward quickly rather than having to wait until the Chapter 7 bankruptcy discharge is issued. It’s a means of evening the scales and making things are fair to both parties as possible.
If the Bankruptcy Court grants the motion, then the company is allowed to pursue collection action against you to claim the asset, such as initiating a foreclosure proceeding or repossessing an automobile. However, there are ways of avoiding foreclosure of your home or repossession of your vehicle, even after that process has begun and whether you are in bankruptcy or not. Your attorney should be able to help you.
Jay S. Fleischman is a consumer bankruptcy lawyer who sues creditors and bill collectors for harassment after bankruptcy. When not helping people with bill problems, he works with attorneys to help improve their law firm marketing efforts.