This post discusses the basics of the “automatic stay” that is in place when a customer files for bankruptcy. This post also includes a discussion of the potential pitfalls that creditors face for violations of the automatic stay.
Automatic Stay – An Absolute Prohibition to Collect
The filing of a bankruptcy petition operates as an automatic stay, applicable to all entities, prohibiting: (1) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (2) any act to create, perfect, or enforce any lien against property of the estate; (3) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the bankruptcy case; (4) any act to collect, assess, or recover a claim [or debt] against the debtor that arose before the commencement of the bankruptcy case; and (5) the setoff of any debt owing to the debtor that arose before the commencement of the bankruptcy case against any claim against the debtor. A creditor violates the automatic stay by undertaking any of these acts. Period. End of story.
Automatic Stay – Willful Violations
Moreover, if a creditor knows the automatic stay is in existence and takes a deliberate act in violation of the stay, the creditor has committed a “willful” violation, which justifies a mandatory award of actual damages. Importantly, the “willfulness” requirement supporting recovery of damages for violation of the automatic stay refers to the deliberateness of the creditor’s conduct and the creditor’s knowledge of the debtor filing a bankruptcy petition; it does not refer to the specific intent of the creditor to violate a court order or the Bankruptcy Code. The debtor shall also recover court costs and attorney’s fees for a willful violation of the stay. Further, any additional finding of maliciousness or bad faith warrants imposition of punitive damages.
Willful violations of the automatic stay may be established only by a “preponderance of the evidence” burden of proof, meaning that a debtor only has to show that “it’s ‘more likely than not’ that the violation occurred” to prevail. The deliberate, unwarranted, and egregious nature of a creditor’s violations of the automatic stay is taken into consideration in awarding damages. However, whether a creditor who violates the automatic stay believes in good faith that it has a right to the property is not relevant to whether the violation was “willful” or whether damages should be awarded.
Examples of willful violations of the automatic stay include:
- offsetting money owed to the debtor against a debt that arose before the bankruptcy petition was filed;
- phone calls to the debtor after the bankruptcy petition has been filed; and
- provoking a criminal prosecution of the debtor.
Bottom line? Once a creditor knows a debtor has filed for bankruptcy, a creditor can find itself in hot water for taking any action to collect on the indebtedness or to secure a lien against the debtor.