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Are automatic stays really automatic?

When businesses file bankruptcy, bankruptcy courts issue automatic stays which essentially freeze all collections. Fortunately, creditors can petition the court to obtain relief from the automatic stay. Then a judge can grant relief to creditors, which enables them to resume their collection efforts.

Grounds for relief

There are several valid reasons for the relief of an automatic stay. The most common is an argument that the debtor has no equity in a property. They can also argue that the property is not critical to the debtor’s bankruptcy reorganization. In addition, the creditor may argue that the debtor or trustee is not making required payments or performing their duties under the bankruptcy’s conditions.

Forms of relief

There are four forms of relief from these automatic stays:

  • Termination: It ends the stay so creditors to continue their efforts to collect. It does not validate any previous illegal attempts to collect during the automatic stay.
  • Annulment: As with marriage, annulments treat an automatic stay as if it never existed. The creditor is vindicated if they attempted to collect the debt during stay. The only way to get this type of relief is to prove that the debtor acted in bad faith and the creditor acted in good faith and did not knowingly violate the stay.
  • Conditioning: This requires the debtor or trustee to satisfy certain conditions for the stay to remain in effect. The creditor would argue that the stay is diminishing the value of debtor’s property, and the court would stipulate conditions to maintain the value.
  • Modification: This changes the stay so the creditor can proceed with specific actions but not others. An example would be to allow the creditor to take the debtor to court to get a judgement, but the creditor still cannot collect the debt yet.

Get the law to work for you

Bankruptcy provides debtors with many legal protections, but creditors also have rights. Creditors are within their rights to seek relief from those protections and can do so with the help of a lawyer who handles debt collection. By taking this more proactive approach, creditors often get better results than they would in waiting for bankruptcy to be resolved.