In a Chapter 7 bankruptcy, a debtor petitions the court for protection from lawsuits and collection efforts. As soon as the petition is filed, the court grants an automatic stay. This is a legal restraining order that goes out to all creditors whom the debtor has listed on the petition. The stay has the effect of immediately suspending collection actions, and preventing any new actions while the bankruptcy is in progress. Creditors may request relief from the stay, which the court will grant if it has grounds to do so.
Secured Loans and Foreclosures
Any creditor may file a "motion for relief from stay." This is a request to the court to lift the stay and allow the creditor to continue to collect from the debtor. Lenders who hold secured loans, and who are in the process of repossession, may request that the court grant relief on the grounds that a Chapter 7 petitioner will not be able to repay the loan, or keep up the tax and insurance payments. Banks holding mortgage notes, for example, will eventually foreclose, with or without bankruptcy, if the debtor defaults on the loan.
When a motion for relief from stay is filed, the creditor must serve a copy of the motion on the debtor, who has an opportunity to respond. In order to prevent the court from granting the motion, the debtor must show "good cause" to deny it. This might mean proving that payments on the loan are current, or that the lender who filed the motion does not actually possess the promissory note, which is a common situation in the home mortgage business. Otherwise the court will grant the motion, which allows the creditor to continue foreclosure and repossession actions.
As long as the stay is in place, the debtor is protected from collections, repossessions and foreclosures. However, the protection does not last forever. After the bankruptcy petition is filed, the court trustee seizes any non-exempt property the debtor has and sells it to pay debts. Once this process is finished, and the court resolves any other motions and issues, the court will grant a discharge (cancellation) of most debts. At this point, the bankruptcy case closes, the stay is lifted and the debtor is again subject to legal action and collections efforts on the part of creditors who have not had their debts discharged by the court.
Chapter 13 Relief
A creditor in a Chapter 7 case may be more motivated to seek relief from the automatic stay than in a Chapter 13 case. In a Chapter 13 bankruptcy, the court trustee sets up a repayment schedule, allowing the debtor to repay secured loans and a portion of all unsecured loans over a period of three to five years. Unless a secured creditor has reason to believe the borrower will default on the plan and the debt, it would have little motivation to request relief from the automatic stay, as it will eventually be repaid according to the plan.