Creditors Asking for Relief from Stay NOT to Pursue Collateral
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:
- whether you are liable on the debt or claim at all
- 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.