Your Rights When a Creditor Violates the Automatic Stay

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The bankruptcy code contains many provisions designed to protect those who file. Two of the most common are the discharge and the automatic stay. In The Automatic Stay: How It Protects You When You File Bankruptcy, we discussed the particulars of the automatic stay, what it is intended to accomplish, examples of the collection activities it prohibits, the types of activities that are permissible, and how long it is effective. In this article we talk about what you can do if a creditor violates the automatic stay.


Automatic Stay Violations Can be Accidental or Deliberate

Even though the automatic stay is designed to prevent creditors from taking improper actions, sometimes they do. This can happen for a number of reasons, but most often it’s done because of timing issues or ignorance of the law. Unfortunately, sometimes a creditor will violate the stay in a deliberate attempt to circumvent the bankruptcy code.

When a bankruptcy case is filed, the automatic stay goes into effect immediately, but sometimes it takes a week or more for a creditor to find out about the case. Some creditors find out almost immediately if they have registered an email address with the court and the system is able to match the creditor with the listing in the bankruptcy case. Some large creditors subscribe to services like Banko, which gathers information about bankruptcy cases and makes it available to creditors to compare against their own databases.

Otherwise a creditor will only learn of the bankruptcy case when it receives a notice from the court or if the debtor informs the creditor himself.

The paper notice from the court contains information about the effect of the stay and the actions the creditor is prohibited from taking. Here's a copy of the official form used by the bankruptcy courts to notify creditors. Note the first paragraphs describe the automatic stay, its effect, and the consequences for violating it. 

When time is of the essence, your attorney will often notify particular creditors immediately after the case is filed. This can often make all the difference when trying to prevent a repossession or a foreclosure from taking place.

During the lag time between the filing of the case and the time the creditor actually receives notice, it's not at all unusual for you to receive collection letters, statements demanding payment and even telephone calls from creditors. While these actions are technically in violation of the automatic stay, they are not actionable because the creditor can claim ignorance of the case.

To be actionable, you will have to show the court that the creditor acted willfully. That is, the creditor must know that the action it is taking is prohibited. Once the creditor learns of the case, or should have learned of the case either from official notice from the court or unofficial notification from the debtor, your attorney or even from other sources like news media, the creditor is charged with the knowledge that its collection activity is prohibited, and the creditor is liable for any violation that takes place.

Many creditors, especially large institutional creditors like banks, credit card companies and large retailers, have in place systems that should prevent calls, letters and statements once the creditor learns of the filing of the case. This does not always happen. Other creditors, especially small “Mom and Pop” businesses, friends and relatives may not understand how the automatic stay works and may continue collection efforts despite receiving a notice.

Bankruptcy attorneys advise their clients to keep their filing information handy, including the case number and the name of the court in which the case is filed, to provide to creditors who call. That way, if the calls continue, the creditors can be held accountable for contacting the debtor in violation of the automatic stay.

Penalties for Violating the Automatic Stay

When a creditor violates the automatic stay, the penalty depends on the nature of the violation and whether it was done with deliberate disregard for the bankruptcy filing. When the violation involves an action against property, like a repossession or foreclosure, the court will likely require that the property be returned to you and that you be compensated for any damages suffered as a result of the violation. The damages can include out-of-pocket costs like renting a vehicle to get to work after your car was repossessed.

It can also include your attorneys fees and costs for having to bring the motion before the court, and even pain, suffering and mental anguish.

What to Do When You Think a Creditor Has Violated the Automatic Stay

If you think a creditor may have violated the stay, contact your attorney immediately. An experienced bankruptcy attorney will know whether the contact is innocent and unknowing or a willful violation worth pursuing. 

     Make sure the automatic stay is in effect.

You can't tell if the creditor has violated the stay unless you know for certain that the stay was in effect. Sometimes it doesn't go into effect when the case is filed, and sometimes it lifts before the case is finished.

First, keep in mind that the automatic stay generally, but not always, goes into effect when the case is filed. If you filed a prior bankruptcy case that was pending in the one year period before the present case, the automatic stay will last only 30 days unless you ask the court to extend it. If you've had two cases pending during that year, the stay does not go into effect when the case is filed. You have to ask the court to impose it.

Also, the automatic stay can dissolve or lift while you're still in bankruptcy and before you have received your discharge. Learn more at How Long Does the Automatic Stay Last?   

     Has the creditor received notice of the bankruptcy?

If you just filed bankruptcy, it could be that the notice hasn't reached the creditor. If you continue to receive notices from the same creditor after a reasonable period, two weeks or so, bring it to your attorney’s attention so that the attorney can contact the creditor to make sure that the information about your case has been properly recorded.

Keep your case number and the name of the court (for instance, the Bankruptcy Court for the Northern District of Texas, Dallas Division), and your attorney’s name and phone number handy so that you can provide that to any creditors who reach you by phone. Once you tell them you filed bankruptcy, they have a right to ask for the bankruptcy info, but they do not have a right to continue to ask for payment. Keep a record of any further calls you receive from that creditor and be sure to inform your attorney of the creditors to whom you provided your bankruptcy information.

     Did the creditor repossess your property after the bankruptcy case was filed? 

If your property is repossessed, contact your attorney immediately. Most creditors will return the property or make the property available once they learn that a bankruptcy case has been filed. If they refuse, they can be held in contempt of court, fined and made to pay damages for their arrogance.

You can find out more about what happens when a creditor violates the automatic stay in Are You a Creditor? Don't Do This In a Bankruptcy Case.

Check out some general info about what the automatic stay can do at The Automatic Stay: How It Protects You When You File Bankruptcy.

For more on when the automatic stay is effective, read How Long Does the Automatic Stay Last?


Updated by Carron Nicks May 2017