What is a violation of the automatic stay?

One powerful benefit of the bankruptcy process is the automatic stay, which prevents a wide range of collection activity. The automatic stay allows the bankruptcy case to run its course without creditors and other parties unravelling its effectiveness with out-of-bankruptcy collection activities.

Creditors sometimes violate the automatic stay, more frequently than one would expect. A critical distinction for how violations are treated lies in whether the violation was willful or not. Under 11 U.S.C. 362(k)(1), most willful violations of the automatic stay result in the creditor being liable for actual damages, attorneys' fees, and even punitive damages. This can be stiff penalty for a misbehaving creditor, and would fix the actual harm with no out-of-pocket cost to the debtors. If the violation was not willful, the act itself might be void (for instance a judgment taken in violation of the stay), but the debtor would generally not be compensated for the trouble.

Good notice to creditors of the bankruptcy filing is an important part of making sure any violations of the stay that might happen would be considered willful violations.

The stay itself is broad, and encompasses a number of acts by creditors, including:

  • Taking action in a lawsuit on a pre-petition debt, including serving process.
  • Enforcing a pre-petition judgment against the debtor or the property of the estate.
  • Acts to possess or control property of the estate (the stuff the debtor owed at time of filing).
  • Enforcement of a lien, as well as creation or perfection of lien, against the property of the estate or against the property of the debtor for a pre-petition claim
  • Other acts "to collect, assess, or recover a claim" on a pre-petition debt.
  • Setoffs of certain debts owed to the debtor against pre-petition claims.

In short, a creditor can't demand to be paid, informally or with judicial process, and has to leave the debtor's property alone. The bankruptcy process decides who gets paid, and if any property is available to the benefit of creditors.

Terms: 
Automatic Stay
Creditor Misconduct
Category: 
Process After Filing Bankruptcy
Wed, Jun 13 2012 - 8:23am by (emf [at] fabriciuslaw.com Twitter Google+)
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