What Is The Automatic Stay In Bankruptcy?
What is the “automatic stay”?
When a debtor files for bankruptcy, the debtor is covered by an umbrella of protection called the automatic stay. It is a stay imposed by bankruptcy law that prohibits most creditors from taking action against the debtor or the debtor’s estate. As can be deduced by its title, the protection is automatic and the debtor need not take any action other than filing bankruptcy for it to take effect in most circumstances.
What does the automatic stay protect the debtor and the debtor’s estate from?
The automatic stay protects the debtor and the debtor’s estate from all debt collection activity including collection calls, sending bills or invoices, and even prevents foreclosure sales and pending civil court hearings. The automatic stay has protected a countless number of our clients from losing their home, having to attend a deposition, having a judgment placed against them, and losing a vehicle to repossession.
What happens if the automatic stay is violated?
Believe it or not, too many times creditors do not understand the protections afforded by the automatic stay and violate it by continuing or beginning collection efforts once it is in place. The good news is any action taken in violation of the automatic stay is void ab initio, void which means from the outset. The bankruptcy court can reverse any actions taken in violation of the stay such as forcing a lender to return a repossessed vehicle or refunding money wrongfully garnished. You may ask what about collection calls placed or bills mailed after filing? The bankruptcy court also has the power to issue injunctions and sanctions to compel the creditor from ceasing all further communication.
Can a creditor be penalized for violating the automatic stay?
Quite simply, YES! If a creditor is found to have willfully violated automatic stay then the bankruptcy court can sanction the creditor and award damages to the debtor. A willful violation occurs when the creditor had knowledge of the bankruptcy and took its action anyway. An innocent violation can occur when the creditor takes action after the stay is imposed but before the creditor has notice of the case. However, if the innocent creditor fails to take prompt action to reverse the violative act, then the innocent violation can turn into willful omission. Courts take willful violations very seriously and have no quarrel with sanctioning a creditor not following its orders. Sanctions can be in the form of monetary punitive damages, requiring the creditor to take steps such as training programs to prevent future violations from occurring, striking the creditors proof of claim in the case, along with any other appropriate actions.
How long does the automatic stay remain in place?
In most circumstances, the automatic stay remains in place throughout the case. Upon the successful completion of the case the debtor will receive discharge which acts a permanent injunction against the same conduct protected by the automatic stay. Creditors, in most cases secured creditors which have debts secured by property, can request the bankruptcy court give the creditor permission to take the property back. This mostly occurs when property is being surrendered or the debtor is not current on the obligation and has failed to provide a plan to become current.
If the creditor gets relief from the stay, can the creditor begin collecting again?
It depends on the relief that was granted by the bankruptcy court; in almost all circumstances the answer is NO! In most cases when stay relief is granted, it is limited to a secured creditor being allowed to take back its property be it through foreclosure or repossession. The creditor is NOT entitled to begin placing collection calls or seeking the deficiency amount owed between the property value and loan balance. Any violation going beyond the stay relief order should be deemed a willful violation and subject the creditor to sanctions as there is no way the creditor can claim it had no knowledge of the bankruptcy after it has sought relief from the bankruptcy court.
Does the automatic stay cover all debts and proceedings?
No, some matters are outside the scope of the automatic stay. Those matters include criminal proceedings, debts incurred after filing bankruptcy, some family court proceedings, among others.
The automatic stay is an important concept for both debtors and creditors in a bankruptcy proceeding. Debtors must understand what protections they are afforded because, as with anything else, the protection is only as good as the knowledge of it to use it. Creditors must understand and respect the boundaries placed on them by the automatic stay or they may face grave consequences from the court.
This Blog was written by Attorney David Fineman, Esq. of The Dellutri Law Group, P.A. Mr. Fineman practices Bankruptcy Law, Fair Credit Reporting Act Law, Fair Debt Collection Practices Act Law and in other areas of Consumer Law.
