When a bankruptcy petition is filed a federal injunction automatically goes into place which prevents creditors from attempting to collect debt that was incurred prior to the bankruptcy filing. This injunction is called an automatic stay. The automatic stay doesn’t last forever. It ends naturally when the bankruptcy case is finished and can be lifted before the end of the case by court order.
In order to obtain a court order lifting the automatic stay creditors file a document called a Motion for Relief from Stay. If the motion is granted the creditor can pursue collection efforts, including repossession and foreclosure of secured property, limited by the terms set out in the court order and state law. Creditors file these motions for many different reasons. One common reason these motions are filed is because the debtor has failed to make post-petition payments to the creditor as set out in their Chapter 13 bankruptcy plan. Sometimes a Chapter 13 plan states that the debtor wishes to keep their secured property and that they will continue to make payments outside of the plan. If the debtor doesn’t continue to make payments as stated in the plan the creditor will try to lift the automatic stay and seize the property.
Another common reason creditors try to lift the stay is when their interests are not being adequately protected due to the debtor’s failure to keep the secured property insured. Many states have laws that require the debtor to maintain insurance on secured property. The insurance usually has the creditor listed as the loss payee, so that if the insurance policy pays out the money goes to the creditor first. This requirement ensures that if the value of the collateral securing the loan is diminished because of accident, fire, or any other reason, the creditor is protected. Failing to maintain insurance on the property creates a risk that the creditor’s collateral could lose value. Generally, motions to lift stay can be resolved simply by curing the problem that gave rise to the motion being filed and entering into an agreement with the creditor called an agreed order.