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:
- whether you owe a debt or a claim at all
- 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.