Addressing a Lender’s Motion for Relief from Stay in Chapter 13 Bankruptcy

March 10, 2011

By: David M. Serafin

For any bankruptcy case in Colorado where my client has a mortgage or car loan, chances are that the lender will file a Motion for Relief from (Automatic) Stay, particularly if the client is either upside down in equity and/or is behind in payments.  Invariably, when we meet at my Denver, Colorado law office, the client will ask two questions: (1) will I lose my house or car, and (2) do I need to appear in court.

The Automatic Stay strictly preventing almost any type of collection activity immediately goes into effect the minute a chapter 7 or chapter 13 is filed in Colorado.  The Automatic Stay will halt any foreclosure, repossession, civil collection lawsuit, wage garnishment and even the harassing creditor phone calls.  The Motion for Relief from Stay is filed by a secured creditor (with a security interest in a house or car) requesting that the bankruptcy court allow it to resume collection efforts against you.   

Your overall financial situation and whether you intend to keep certain property will determine whether opposing a lender’s Motion for Relief from Stay is feasible.  There’s no reason to challenge Relief from Stay being granted to a lender for a house or car you intend to surrender (as evidenced in the chapter 13 plan).  Even if Relief from Stay is granted, the bankruptcy discharges any personal liability for the debt, except to the extent that a portion of the unsecured debt is required to be paid back depending upon your disposable income per Section 1325 of the Bankruptcy Code.  Also, should any equity in the property remain after the creditor is fully paid with the sale proceeds, the difference will be paid to the trustee and credited to your monthly plan payments.

Other times, you may intend to keep property subject to a lender’s Motion for Relief from Stay.  In situations whereby no agreement to keep the property (such as a loan modification or paying back post-bankruptcy petition arrears) with the lender is reached, challenging Relief from Stay is necessary.  Typically, Relief from Stay will inevitably be granted if you’re either upside down in equity and/or behind in payments on a potentially depreciating property, such that the lender’s security interest is jeopardized.  Another way to keep your house or car in chapter 13 bankruptcy is for the plan to cure arrears (e.g. the amount you’re behind by) or provide for the lender to receive “adequate protection” for depreciating personal property.   

Regardless, absent settlement, Relief from Stay can be defended against in Colorado Bankruptcy Court if you can show the bankruptcy judge that you are able to cure the arrears in the chapter 13 plan and continue making the regular mortgage or car payment directly to the lender, or that any missed payments are attributable to special circumstances (such a health problems).  Conversely, the lender can show the court that denial of Relief from Stay is unfair if its security interest would otherwise be jeopardized.

A unique chapter 13 case I’m currently involved with concerns a mortgage lender’s initial Relief from Stay before confirmation of the chapter 13 plan.  After plan confirmation, the debtor eventually fell behind in mortgage payments (but not plan payments) and the lender sought foreclosure.  We modified the plan post-confirmation to cure the mortgage arrears in full (plus all of the lender’s fees/costs) with proper service to the lender before the foreclosure sale, only to later learn that the lender (stubbornly) refuses to rescind the foreclosure or enter into a new loan agreement with the debtor.  We intend to ask the Colorado Bankruptcy Court to decide this issue.   

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