Automatic Stay: Violations and Creditor Consequences

The automatic stay is a chief protection offered by the bankruptcy process, and many people welcome the relief that it brings. Once someone files a bankruptcy petition, all debt collection efforts stop. There's breathing room while working through your bankruptcy case.

The automatic stay isn't empty protection, either. Bankruptcy law puts force behind the automatic stay, and creditors face consequences if they violate it. Know how the law protects you once your bankruptcy case begins.

Role of the Automatic Stay

The automatic stay gives breathing room to everyone involved with a debtor's finances. Collection efforts, including repossession, garnishment and related lawsuits come to a halt once you file a bankruptcy petition. Many of your debt issues will be resolved in your case, and the automatic stay helps to gather all of your debt disputes into the bankruptcy court.

The automatic stay works in favor of creditors, too. Sorting out your debt issues needs to done in a fair manner, so no single creditor should have an advantage in collecting on its debt.

Automatic stay enforcement isn't done on the honor code system, and there are real consequences for creditors that don't follow the rules. A creditor may face orders for contempt, damages or sanctions.

Voiding Creditor Actions

An action taken by a creditor contrary to the stay is void. For example, a repossession or foreclosure sale would be invalid. The court has the power to reverse an action, for example, order the return of a repossessed car or piece of machinery. Further creditor violations can be addressed by an injunction, ordering a creditor not to act against the stay.

Debtor Rights to Damages

Creditors face liability for damages to debtors for automatic stay violations. You may seek actual damages, punitive damages, attorney's fees and costs. It's also possible to recover damages for emotional distress. So, your relief might include return of property or money, or damages for loss of use of your property or wages you lost due to time spent resolving a violation.

You must show the creditor's willful violation of the automatic stay caused your injury or loss. Willful means that the creditor knew the stay was in effect. You do not have show any ill intent behind the creditor's action.

Violating the Automatic Stay and Contempt

Creditors can face consequences for contempt (violating a court order) because the automatic stay is a court order. The sanctions a court can order for contempt include fines and attorney's fees and damages. Punitive damages aren't available for contempt.

Other Laws Offer Help for Violations

Bankruptcy law isn't the only source of relief when a creditor violates the automatic stay. You may have a claim against a creditor based on state unfair trade practice laws, federal debt collection laws, or a legal theory such as negligence.

Creditor Notice and Enforcement Action

Creditor Notice

Notice is key to triggering the protection of the automatic stay, and relief for violations. A creditor can claim that it didn't have notice of your bankruptcy, and that you aren't entitled to damages for automatic stay violations. Creditors can receive notice in several ways:

  • Receipt of the court notice of your case, including the date for the meeting of creditors and deadlines
  • Direct notice by you to the creditor or its agent, preferably in writing. This could happen if you file just before a creditor takes some collection action, such as repossessing your car
  • Attaching a copy of your bankruptcy petition to any property the creditor may try to repossess

Also, there are automated systems to alert creditors to bankruptcy filings by customers. Creditors are also expected to have procedures in place to manage such notices, allowing all parts of a business and it agents to follow bankruptcy law.

Your Steps for Enforcement

When faced with a violation, act quickly with your lawyer's help to protect your rights. Your lawyer may start by filing a motion or complaint with the bankruptcy court for the best chance of a quick response. Starting the process in bankruptcy court can be the best choice if a creditor's conduct involves a state court proceeding.

Questions for Your Attorney

  • Will a creditor return my repossessed car, which was taken after I filed my case, if I ask, or do I need a court order?
  • Are public utility companies creditors, and are they liable for stay violation damages? What if I suffered losses due to utilities being shut off?
  • A collection agency won't stop its calls and collection efforts, and it knows about my bankruptcy case. Are both the agency and the creditor in violation of the automatic stay?

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