What happens after an automatic stay is lifted?

Impact on creditors

“An automatic stay is basically a pause button,” according to Joe Camberato, CEO of National Business Capital, a lending platform for business owners. “When someone files for bankruptcy, the court puts the stay in place automatically.” In order to initiate this process, the creditor must first file a Motion for Relief from Automatic Stay.

When a stay is successfully lifted, the creditor can immediately resume their formal collection proceedings, such as foreclosure, repossession or pursuing a legal judgment, Camberato says. There are a few reasons why a creditor might want to do this:

• It believes the debtor is not acting in good faith: For example, a tenant is not taking good care of a rental property, causing it to depreciate in value, Camberato says.
• It wants to collect actual property from the debtor: This is typical for secured debts like mortgages and car loans that are delinquent or a rental property where the debtor is behind on rent, according to Ashley Morgan, an attorney in Herndon, Virginia.
• An injured party needs access to the debtor’s insurance: For example, if the debtor was at fault in a car accident, Morgan explained, a Motion for Relief from the Automatic Stay lets “the other party in the accident to collect against the debtor’s insurance, even as the debtor remains protected by the bankruptcy.”
• Funds are needed for child support services: If someone files for bankruptcy but is already under a child support order, they must continue making those payments if at all possible. An automatic stay can be lifted to collect these payments.

Once the Motion for Relief from the Automatic Stay has been granted by the court, the creditor retains rights toward the specific collateral that is part of the motion, Morgan says. A good example of this is a car company that can move forward with repossession of a car where the owner is severely delinquent with payments.

It’s important to note, however, that you will still be protected from all other debts under the bankruptcy filing. It’s only the particular asset in question that a creditor can collect on.

Debtor's obligations

If the automatic stay is lifted by a particular creditor, you are then obligated to pay the debt despite having successfully filed for bankruptcy. If this happens and you can’t pay the debt, one of the following things can happen:

• You can attempt to negotiate a payment plan with the creditor.
• You can attempt to enter into a settlement with the creditor.
• The creditor can seize the asset in question (in the case of a physical asset like a car loan or a mortgage).
• You might face legal consequences like foreclosure, wage garnishment or a bank levy.

If a creditor is granted a Motion for Relief from Stay, you can take comfort in the fact that the Relief from Stay is only relief against the specific property, Morgan says. “Even with relief, you personally — along with your assets — will still be protected by the bankruptcy filing,” she said.

This can be a bit of good news: Bankruptcy still protects you from having to pay other debts, which could free up some of your money to put toward the debt that’s no longer covered under the automatic stay.

Continuation of the bankruptcy process

The remainder of the debts left in bankruptcy will continue through the normal proceedings, according to Camberato. Anything not covered by the Motion for Relief of Automatic Stay will be subject to typical bankruptcy timelines, depending on which type of bankruptcy you file.

In general, Chapter 7 and Chapter 13 bankruptcy follow a similar process, though Chapter 13 tends to have a much longer timeline. Chapter 7 is typically a three to four-month process; Chapter 13 typically takes three to five years. Chapter 13 plans typically are payment plans over the course of 35 to 60 months.

Here’s a brief breakdown of the bankruptcy process:

• You file for a petition for bankruptcy in state court, listing all creditors you owe.
• Once your petition is accepted, an automatic stay goes into place, which immediately stops creditors from collecting on outstanding debts.
• The court appoints a bankruptcy trustee whose job is to act as a go-between for you and your creditors.
• After a period of time, your debts will be discharged under the bankruptcy.
• Your trustee will use any assets you do have to pay priority debts.

Priority debts (sometimes called non-dischargeable debts) must be paid in full, even during bankruptcy. Examples or priority debts include things like recent tax debt and past due alimony and child support. If you file for Chapter 7 and your assets are sold off, any leftover money after liquidation will go toward paying what you owe in child support.

Long-term financial implications

Filing bankruptcy can have long-term effects on your financial health, both good and bad. It’s a good way to finally get your head above water if you’ve been drowning in debt, fees and garnishments for a long time.

But it can severely impact your credit, which will make it difficult for you to secure loans in the future, open new credit cards or qualify for the best interest rates on purchases. Before filing for bankruptcy, it’s crucial to explore all options and to learn about debt settlement vs bankruptcy to figure out which option might be better for your long-term financial situation.

Despite that, it’s totally possible to rebuild your credit — and your financial situation — in the wake of filing for bankruptcy. Camberato provides several solid tips for coming back after bankruptcy:

• Open a secured credit card: It’s easy to manage, and a great way to prove you can handle credit responsibly.
• Get a co-signer: Ask a trusted friend or family member to cosign on a small loan or credit card.
• Work with a reputable credit repair agency: They can help clean up your credit report by disputing errors or getting old, negative items removed faster.
• Stay consistent: Pay everything on time - every single time.
• Start small: Keep your balances low and avoid taking on debt you don’t need.
• Consider financial counseling: Sometimes, a bit of education can help you avoid past mistakes. A financial counseling service can help you figure out a debt payoff strategy and can help you craft a budget that helps you stay out of debt.