What to Do if a Creditor Violates the Automatic Stay

Person taking a call from a creditor
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The bankruptcy code is a collection of statutes designed to protect debtors who file a petition seeking protection from creditors. Two of the most common rules are bankruptcy discharge and the automatic stay. The discharge is the final court order that permanently removes your debts.

The automatic stay temporarily prevents creditors from continuing their collection attempts. Here's what to do if a creditor violates the stay by making attempts to collect.

Hire an Attorney to Manage Your Bankruptcy

One of the benefits of hiring an attorney to manage bankruptcy proceedings is having an authority figure and expert appeal to the court to hold those who violate a stay accountable.

An experienced bankruptcy attorney will determine whether the creditor’s contact is innocent or a willful violation worth pursuing. Attorneys also know how to protect you from creditors, negotiate with them and help you build a repayment plan. If necessary, they can help the court and creditors understand any exceptional circumstances you may have.

Determine if the Breach was Accidental or Deliberate

While the automatic stay is designed to stop collection efforts for the duration of the bankruptcy proceedings, it doesn’t always work the way it is intended. A breach of a stay is governed by 11 U.S. Code 362(k), which provides for damages and reimbursement of attorney's fees. The law allows for punitive damages when a creditor’s willful violation injures a bankruptcy petitioner.

Collectors may not always receive notice of your bankruptcy filing, so you may need to inform them.

Contrary to popular belief, most creditors are not evil people maliciously trying to harass you into paying for a debt. When a creditor infringes upon a stay, it is typically because they lack awareness of a bankruptcy petition or lack knowledge of bankruptcy laws.

Creditors have a right to ask for bankruptcy information—but once notified, they do not have the right to continue to ask for payment. If collection correspondence continues, a debtor’s attorney can contact the creditor to ensure they have been officially notified and then record the occurrence for the bankruptcy proceedings.

Keep Records of Everything

While not common, there have been cases where overzealous creditors deliberately try to circumvent the bankruptcy code and infringe upon the stay. Keep a log of any collection calls from creditors who have received the bankruptcy notification, and notify your attorney when it happens.

Bankruptcy petitioners are often counseled to keep their case number handy along with the court's name and the location where the case is filed. The intent is to notify creditors who are unaware of the filing, and give them a way to verify that you have filed.

That way, if the collection calls continue, the creditors can be held accountable for contacting you in violation of the automatic stay.

Establish a Breach of Stay

After a bankruptcy petition is filed, the court will issue a Notice of Filing, at which time the automatic stay goes into effect. Sometimes it takes a week or more for a creditor to find out about the case.

Some creditors—especially small businesses, friends or relatives—may not understand how the automatic stay works and continue collection efforts despite receiving a notice.

Notification can occur through the court system (if registered) or through subscription services such as Banko Solutions, which collects bankruptcy case information and makes it available to creditors, who can then compare the petition with their data.

During the time between filing and the date the creditor receives notice, it's not unusual for the debtor to receive collection letters, statements demanding payment or phone calls from creditors.

While these actions may violate the automatic stay, they are not actionable because the creditor can claim they were unaware of the bankruptcy filing.

Institutional creditors like banks, credit card companies, and large retailers have systems that should prevent calls, letters, and statements once they learn there is a filing. However, this doesn't always mean that you won't receive a call from them.

If creditors refuse to return property, they can be held in contempt of court, fined and be forced to pay damages for their arrogance.

Notifying creditors personally rather than waiting on the court’s notification procedure can prevent a repossession or foreclosure that’s in process from taking place. If an asset has been repossessed, most creditors will return it or make it available once they learn that a bankruptcy case has been filed.

Print and Send the Notice of Filing

One way to ensure that creditors are informed and knowledgeable about the bankruptcy is to print the Notice of Filing from the court docket. You can create a Notice of Filing and deliver it to creditors by certified mail with a return receipt rather than waiting on the bankruptcy court. The return receipt can serve as proof of service.

The official Notice of Filing includes details about the injunctive effect of the stay and prohibited actions. For example, the first paragraph states:

“...While the stay is in effect, creditors cannot sue, garnish wages, assert a deficiency, repossess property, or otherwise try to collect from the debtors. Creditors cannot demand repayment from debtors by mail, phone, or otherwise. Creditors who violate the stay can be required to pay actual and punitive damages and attorney’s fees.”

If there is a breach of the stay, proof that all creditors were made aware of the bankruptcy can be attached to an application seeking damages, which will help prove to the court that the violation was willful.

Know When a Stay Is in Place

While stays are generally effective as soon as a petition is filed, there are occasions where they might not be automatic. For example, if there has been a bankruptcy case within 12 months of the filing, the automatic stay will last only 30 days unless the court extends it.

If there were two cases pending during the previous 12 months, a stay would not go into effect when the bankruptcy is filed. Instead, the court would have to impose it.

If a Bank Is the Collector

While the automatic stay is law, it isn't a guarantee that collectors won't be able to continue collecting. If a bank is the collector, they might be able to freeze your accounts after being notified of a bankruptcy filing.

A bank’s ability to freeze a debtor’s bank account without violating an automatic stay was addressed in Rodney Wayne Weidenbenner's lawsuit against Wells Fargo in 2014. The national bank violated the petitioner's automatic stay, and the court awarded damages of $25 and about $15,000 in attorney's fees and costs. The decision was reversed in 2019.

When the decision was reversed in 2019, a precedence was set stating that it is OK for banks to place a brief hold on an account if they seek relief from the stay—the ability to continue collecting on a debt to the degree the relief from stay order allows.