What is the automatic stay? What is the penalty for creditors who violate it?

3293465641_b6c5081e87_mBankruptcy Debtors Are Shielded From Collection Activity

Bankruptcy is designed to help you get back on sound financial footing. That can’t happen if you still have to worry about creditors garnishing your wages or foreclosing on your home. So, bankruptcy comes with some serious protection against creditors trying to collect. The automatic stay is the most important protection afforded to debtors.

What is the automatic stay?

The automatic stay is a powerful injunction that takes effect as soon as you file for bankruptcy. With the automatic stay in place, you’re protected from creditors attempting to pursue collection. They can’t repossess, foreclose, sue, or pursue you for collection in any way. They have to go through the bankruptcy court. This gives you some breathing room and also makes the bankruptcy process fairer for creditors – they’re all treated equally so there’s no race to collect from you as soon as you file.

The law that creates the automatic stay gives a long list of prohibited creditor behaviors. Creditors can’t bring suit against the debtor and any suits in process when bankruptcy is filed have to stop. They also can’t attempt to collect on the judgment from an earlier suit. They can’t repossess or seize any of your property or “exercise control over property of the estate.” Finally, they can’t create or enforce a lien against your property. 11 U.S.C.A. § 362

That list covers every method a creditor may employ to attempt to get payment from you. In practice, creditors are basically prohibited from contacting you at all. They can’t call you, they can’t send letters, they have to stop garnishing your wages, and they have to halt any lawsuits pending against you. The bankruptcy court steps between you and your creditors to make sure that you and each creditor get the fairest possible treatment.

When do I get the protection of the automatic stay?

You’re protected automatically as soon as you file and the stay lasts as long as your bankruptcy does – several months for Chapter 7 and 3 to 5 years for Chapter 13. You don’t have to check any boxes or do any extra paperwork – it just comes with the bankruptcy. In addition, the automatic stay protects co-debtors. The courts don’t want creditors to put pressure on debtors through their family and friends, so co-debtors get the benefit of the stay. 11 U.S.C. § 1301. Co-debtors may even be entitled to damages if creditors violate the stay, although there is some uncertainty in the law.

If you file for bankruptcy multiple times in a short period, however, you may not be entitled to the protection of the automatic stay. If you file for bankruptcy once, have voluntarily have your case dismissed, and file again within 180 days, you don’t get the protection of the automatic stay at all. In re O’Brien, 2012 WL 4928915 (N.D. Ohio 2012). If you file for bankruptcy more than twice in a year and your first cases were dismissed, you only get the protection of the automatic stay for 30 days after you file. 11 U.S.C. § 362(c)(3). Cases are generally dismissed because the debtor failed to comply with some court order or requirement or because the debtor requested dismissal. For most debtors, this isn’t an issue.

What can creditors do about the automatic stay?

A creditor may request relief from the automatic stay. However, the court will only grant relief from the stay if the creditor has a claim to property that is not adequately protected or if the creditor can prove that the property won’t matter for the purposes of the bankruptcy. Both of these things are difficult to do. Courts are likely to grant relief from stay if there is evidence that the debtor may try to hide, steal, or damage the property in question. 11 U.S.C. § 362(d). The court may also grant relief from stay for a creditor whose interest is secured by your home 90 days or more after you file unless you’ve filed a reorganization plan under Chapter 13 or started making your mortgage payments. In other words, your mortgage lender can get permission to foreclose if you don’t file your reorganization plan or start making payments within 90 days of filing. Id. Finally, if a creditor requests relief from the stay and the court ignores that petition for 30 days, the stay is lifted. § 362(e)(1).

To make a long story short, a creditor can try to have the stay lifted. However, motions for relief from stay are relatively rare and the court grants them infrequently. The creditors bear the burden and expense of proving why they should get relief from the stay and it’s generally not worth their time. Courts are unwilling to grant relief from the stay very often because they prefer to have creditors deal with collection through the bankruptcy court.

What happens if a creditor violates the automatic stay?

Generally speaking, creditors know better than to continue to contact you or attempt to collect after you file for bankruptcy. In most instances where creditors contact you after you file, they haven’t received notice yet of your filing. However, some creditors will attempt to push the line.

When that happens, the court will order the creditor to restore the debtor’s property. That may mean returning a repossessed vehicle, halting foreclosure on a home, paying back garnished wages, or stopping a lawsuit. In addition, the debtor is entitled to actual and punitive damages. This means that the creditor in violation must pay whatever costs accrued to the debtor because of the violation. That includes the debtor’s attorney fees and court costs incurred to fight the violation. If the creditor’s actions were particularly outrageous or malicious, the debtor may even be entitled to punitive damages above and beyond the actual damages received.

Courts will step in to enforce the automatic stay. Bankruptcy courts in Ohio have forced banks to pay damages in the form of attorney fees, court fees, and lost wages for scheduling a sheriff’s sale of the home of a bankruptcy filer. In re Webb, 472 B.R. 665 (B.A.P. 6th Cir. 2012). Ohio bankruptcy courts have awarded attorney fees, court fees, and travel fees when a bank sent a billing statement to the debtor after he filed for bankruptcy. In re Grine, 489 B.R. 461 (N.D. Ohio 2010). They’ve also awarded damages for continuing wage garnishment after the debtor filed. In re Russell, 441 B.R. 859 (N.D. Ohio 2010). The automatic stay is one of the most important features of bankruptcy and the court will not hesitate to act to protect it.

Of course, not everything counts as a violation of the automatic stay. In one Ohio case, the IRS put a freeze on the debtors’ accounts which resulted in a six-month delay of their tax refund. The court ruled that the freeze was not a violation of the stay because it was not a true exercise of control over property and the tax return didn’t count as tangible property. In re Harchar, 393 B.R. 160 (N.D. Ohio 2008). Creditors are also entitled to register criminal complaints against the debtor as long as the complaint is not motivated primarily by the desire to collect the debt. In one Ohio case, a check cashing company lodged a criminal complaint against the debtor for writing a bad check. The court ruled that it was not an attempt to collect and so did not violate the automatic stay. In re Dorsey, 373 B.R. 528 (N.D. Ohio 2007).

Can I still be involved in a lawsuit after filing for bankruptcy?

The automatic stay protects you from actions to collect against your estate, but not from all lawsuits. First, the stay has no effect on criminal proceedings. If you’re in trouble with the law, bankruptcy can’t help you delay your trial. The stay also won’t stop civil suits for the purposes of establishing paternity.

There are certain circumstances in which even a collection action may be possible regardless of the automatic stay. If you owe child support or spousal support, you’re still subject to collection actions after you file for bankruptcy. You’re also still subject to divorce proceedings on the division of your property.

The Bottom Line

The automatic stay provides strong protection from creditors. If you believe a creditor has violated the stay, speak to your bankruptcy attorney. If need be, you can take the matter to court. Bankruptcy courts won’t hesitate to enforce the stay and ensure that you get all the protection to which bankruptcy entitles you.

Image Credit and License

About Russ Cope

Russ B. Cope is dedicated to legal standards that go far beyond filing cases — he is interested in your goals. Russ wants to be certain that each client is making an informed decision that will make their life better, and thrives on the interaction between lawyer and client.