Filing a bankruptcy petition under any chapter of the Bankruptcy Code creates what is called an “automatic stay.” The automatic stay prevents creditors from taking action against a bankrupt individual, known as a “debtor.” Typically, violation of the automatic stay is a serious matter and courts typically tend to punish those that violate the stay and harass a debtor. But what power does the automatic stay actually have?
WHAT CONSTITUTES A VIOLATION OF THE AUTOMATIC STAY
Generally, the automatic stay prevents any telephone calls and letters, but also extends to creditor lawsuits for nonpayment and wage garnishments. Essentially, most attempts to collect a debt is barred under the automatic stay. This includes the following:
- filing or continuing a lawsuit to collect a debt;
- foreclosures where the debtor owns the property being foreclosed on or is a borrower under the loan documents that form the basis of the foreclosure;
- repossessions of personal property (e.g. cars, boats, and other movable collateral)
- wage garnishment; and
- execution on a judgment previously entered.
The stay does not prohibit all creditor actions, however. For example, the following can continue after a bankruptcy is filed:
- certain family law matters, including the collection of child or spousal support
- a criminal action against you
- certain eviction actions (depending on the law of your state)
- some tax-related measures, such as an audit, or
- the collection of a debt you incurred after you filed for bankruptcy.
Often, the automatic stay is used defensively by a debtor. The most prevalent example is to prevent a foreclosure or sheriff’s sale from occurring. Once a bankruptcy is filed, almost all proceeds against the debtor, and their property, must stop.
WHAT HAPPENS IF A CREDITOR VIOLATES THE AUTOMATIC STAY
A violation of the automatic stay is usually damaging to a creditor. First, a debtor will want to make sure that the debt is included in the bankruptcy petition, and the creditor was actually given notice. Notice is the most important part of this step, as a creditor cannot violate the automatic stay if they have no knowledge of it. Further, a debt will not actually be discharged if the party who holds the debt is not notified.
If the debt was correctly listed and proper notice was given, a response to an attempt to collect will usually consist of the bankruptcy information to confirm the communication was not sent by mistake.
If the creditor continues to violate the automatic stay, the next step is proving the violation is willful. A willful violation of the stay occurs when a creditor knows of the bankruptcy filing and continues to contact a debtor. Ensuring the creditor was aware of the bankruptcy filing is a sure way to prove the violation as willful.
Next will come either an adversary proceeding or a motion, depending on the extent of the harm. In some cases, such as where a debtor is being repeatedly harassed, an adversary proceeding is required. In others, a motion to enforce the automatic stay is all that is required. If a creditor ignores the court order, that is just further evidence for the adversary proceeding.
Should the court find the violation was willful, and proper notice was given, the court may award a debtor of nearly $10,000, including $5,500 in attorney’s fees and $3,500 for emotional distress in addition to punitive damages of $25,000. These high costs associated with violations of the stay are further evidence as to why a creditor should avoid any violation, and a debtor should immediately bring a suspected violation to the attention of their attorney.
WHAT CAN A CREDITOR DO TO COLLECT AROUND THE AUTOMATIC STAY
While the automatic stay is powerful, it is not without its own exceptions. A creditor can request the court to lift the automatic stay if they can show good cause. Section 362(d) of the Bankruptcy Code provides how a creditor can seek relief from the automatic stay. This section will examine the two most common reasons: lack of adequate protection and lack of equity.
Under Section 362(d)(1), a court shall grant relief from the automatic stay, allowing a creditor to pursue a debt, if the debtor has failed to adequately protect the creditors interest. While this may seem complicated, what this means is the debtor has failed to prevent a “diminution of value” of the property their debt is secured against. Essentially, the courts will grant relief from the automatic stay if the property may decrease in value while the bankruptcy is pending. This is most often seen with cars and real estate. Adequate protection can take a few forms, including direct payments to the creditor. These adequate protection payments usually take the form of your current monthly payment on the loan.
Under Section 362(d)(2), a court shall grant relief from the automatic stay if the creditor can show (1) the debtor has no equity in the property and (2) the property is not necessary for an effective reorganization. A court will generally find it difficult to find that a personal residence is not necessary for an effective reorganization, at least in a chapter 13 or chapter 11 context. Therefore, this section generally applies more towards properties that are not a debtor’s home, such as investment properties.
If the court grants relief to the automatic stay, a creditor may proceed against the debtor in attempting to collect their debt, including continuing legal proceedings or repossession.
On a related note, the automatic stay may not be in effect if a debtor has recently filed for bankruptcy. If a debtor files a second bankruptcy within one year, the stay is only in effect for 30 days. If the debtor filed two or more cases in the last year, the automatic stay will not be applied to a debtor’s case, and they will continue to be subject to the collection efforts of creditors.
If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and present you with potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.
