When you file bankruptcy, secured creditors, the ones who you generally borrowed money from to purchase a car, home, furniture, or an appliance, want to make sure that the car, home, furniture, or appliance is safe during the bankruptcy. This is because that particular item is securing the loan you have with that lender. In other words, if you stop paying or don’t pay enough, they we will repossess the item to compensate them for the loss. However, during bankruptcy creditors can’t go repossess items unless the court gives them permission. This is because the “Automatic Stay” prevents the creditor from acting as it normally would outside of bankruptcy (for more on the “Automatic Stay” read the posting What is the Automatic Stay?)
There is only one way for a secured creditor to get permission—to file motion for stay relief. There are two reasons that a creditor would win a motion for stay relief. First, if there is no equity. For example, if your car is worth $7000.00 and you still owe the bank $8,000.00, there is no equity in the car and the creditor could get stay relief. Conversely, if the car is worth $8,000.00 and you still owe the bank only $7,000.00, there is equity in the car and the creditor could not get stay relief. The second way for a creditor to win on stay relief is to prove “cause.” This pretty much means that the creditor needs to show that he is not protected. For example, you have a car loan with a bank and the car is in your possession but it isn’t insured, the creditor would win a stay relief motion because the item is unprotected in the event that you get in an accident.