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Creditors can seek relief from an automatic stay in a bankruptcy

On Behalf of | Jan 31, 2024 | Business Litigation

When individuals or businesses file for bankruptcy, there are certain things that happen almost instantly. Creditors typically have to stop their efforts to collect on a debt as soon as someone files for bankruptcy. The courts grant an automatic stay temporarily ending collection activity.

This stay helps protect the filer from unnecessary stress and financial hardship linked to ongoing collection efforts for debts that they could potentially discharge. It can also create a hardship for the parties attempting to collect on valid debts. After necessary meetings and hearings, the courts may also discharge the balance owed on certain eligible debts.

Creditors that discover that a debtor intends to file for bankruptcy often worry about whether they may have to write off a financial obligation. In some cases, it is possible to go to the courts and ask them to lift the automatic stay so that companies can resume collection activity.

When will the courts lift an automatic stay?

No creditor should expect that the courts will grant them special consideration without taking special steps to advocate on their own behalf. Businesses seeking to assert their rights to collect on a debt usually need to take action in their own defense.

Creditors can file a request for a hearing as part of the bankruptcy process. They can ask a judge to review the situation and lift the automatic stay for their specific debt. If the courts rule in favor of the creditor, they can continue reaching out to the filer, taking action against collateral property or even pursuing a lawsuit.

Otherwise, the creditor may be at risk of both delayed collection activity that diminishes their chances of securing repayment and also the possibility of the courts discharging the debt. Creditor relief proceedings can sometimes also involve requests to exclude a specific financial obligation from the bankruptcy proceedings and eliminate the risk of a discharge.

Creditors typically need proof of fraud or other extenuating circumstances if they hope to prevent a debtor from discharging a debt that would otherwise be eligible for discharge as part of a bankruptcy case. Learning more about the rules that protect creditors may benefit companies worried about the financial impact of a debtor filing for bankruptcy.