Your Rights When a Creditor Violates the Automatic Stay

Woman clearly perplexed by a telephone call
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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 statutes are the discharge and 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.

Stay Violations Can be 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. A breach of a stay is governed by 11 U.S. Code 362(k), which provides for damages, reimbursement of attorney's fees, and potentially punitive damages when a bankruptcy petitioner is injured by a creditor’s willful violation.

When a creditor infringes upon a stay, it is typically due to timing, lack of awareness that a bankruptcy petition has been filed, or a lack of knowledge of bankruptcy law.

It could be that the notice hasn't reached the creditor. Creditors have a right to ask for the bankruptcy information, but they do not have a right to continue to ask for payment. If collection correspondence continues, a debtor’s attorney can contact the creditor to ensure that case information has been properly recorded.

Keep a log of any further collection calls from that creditor and of all the creditors who have received the bankruptcy information. There are cases in which overzealous creditors deliberately try to circumvent the bankruptcy code and infringe upon the stay.

“That has been interpreted to mean that the creditor knew of the case and that their actions, which violated the stay, were intentional,” said Janice B. Grubin, a partner and bankruptcy attorney with LeClairRyan, a law firm in New York.

Bankruptcy petitioners are often counseled to keep their case number handy along with the name and location of the court in which the case is filed to provide to creditors who call. That way, if collection calls continue, the creditors can be held accountable for contacting the debtor in violation of the automatic stay.

Establishing 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 immediately. Sometimes it takes a week or more for a creditor to find out about the case. Notification can occur through the court system (if registered), the news media, 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 own data.

During the time gap between the filing of the case and the date the creditor actually receives notice, it's not unusual for the debtor to receive collection letters, statements demanding payment, and even telephone calls from creditors. While these actions may be in violation of the automatic stay, they are not actionable because the creditor can claim they were unaware of the bankruptcy filing.

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.

Let Creditors Know Right Away

Notifying creditors personally rather than waiting on the court’s notification procedure can prevent a repossession or a foreclosure that’s already in process from taking place. If property has already been repossessed, 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.

However, a bank’s ability to freeze a debtor’s bank account without violating an automatic stay is not well-settled thanks to Rodney Wayne Weidenbenner's lawsuit against Wells Fargo, which reversed the Bankruptcy Court's ruling in April 2019, that the national bank violated the petitioner's automatic stay and awarded damages of $25 and about $15,000 in attorney's fees and costs. "A brief hold is generally OK provided that the bank is actively seeking stay relief," said Grubin.

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 or create a Notice of Filing and deliver it to creditors by certified mail with return receipt rather than waiting on the bankruptcy court. The return receipt can serve as proof of service.

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

An official correspondence from the court includes details about the injunctive effect of the stay and the actions that are prohibited. 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.”

Penalties for Violating the Automatic Stay

The penalty for willfully infringing upon an automatic stay depends on the nature of the violation. In cases that involve the repossession or foreclosure of property, such as a car or house, the court is likely to require that the creditor return the property to the debtor and that the creditor reimburse the debtor for any damages suffered, which can include out-of-pocket costs like renting a hotel room, attorney's fees, additional court fees, and even claims for pain, suffering and mental anguish.

Although reimbursement of attorney's fees must be reasonable, there’s no limit on the amount of damages that can be awarded by a judge.

“In the calculus before the court, what may factor into damages is whether it’s a bank, an individual or credit card company that violated the stay,” according to Grubin.

Remedies When a Creditor Violates the Automatic Stay

One of the benefits of hiring an attorney to manage bankruptcy proceedings is having an authority figure to appeal to the court to hold those accountable who violate a stay. An experienced bankruptcy attorney will know whether the creditor’s contact is innocent and unknowing, or a willful violation worth pursuing.

Keep in mind that the automatic stay generally, but not in all cases, is effective as soon as a petition is filed. For example, if a prior bankruptcy case has been pending in the one-year period before the present case, the automatic stay will last only 30 days unless the court extends it. If there are two cases pending during that year, a stay does not take effect when the case is filed. Instead, the court must impose it.

In rare cases, an automatic stay can dissolve or lift while bankruptcy proceedings are ongoing and before discharge.