Don't Do That (Part 2)

 

Part 1 of this three-part series focused on mistakes a debtor in bankruptcy could make with respect to property transfers.  Today we focus on one of the most common, and serious, creditor mistakes: Violation of the “automatic stay.”

An injunction is an order issued by a Judge that directs someone to do or (more often) stop doing something immediately.  The two things most people know about injunctions are: (1) they aren’t easy to get, and (2) they should be taken seriously. 

It’s the – just for fun let’s call it the “injunction function” – that allows the bankruptcy system to work.  A main goal of the bankruptcy system is to allow an orderly procedure, and an orderly procedure isn’t possible if creditors engage in a “free for all” as they compete to dismantle a debtor’s assets.  Whenever a bankruptcy case is filed, the Bankruptcy Code provides for a stay of most types of creditor collection activity.  And this stay happens automatically, making it a special sort of injunction known affectionately as the “automatic stay.” 

The actual statute, Section 362 of the Bankruptcy Code, is lengthy and complex.  It has exceptions, and exceptions to the exceptions, that we won’t get into here.  If you have specific questions about the automatic stay and you aren’t a lawyer, please go ask one.  Like any injunction, it’s a very, very bad idea to fool around with the automatic stay. 

When a bankruptcy case is filed the clerk sends a notice to all creditors that includes the following warning:

The filing of the case imposed an automatic stay against most collection activities. This means that creditors generally may not take action to collect debts from the debtors, the debtors' property, and certain codebtors. For example, 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.

Any action that a creditor takes in violation of the automatic stay is void “ab initio,” meaning “from the very beginning.”  The “no harm, no foul” rule doesn’t apply to stay violations.  Even if a creditor didn’t know about the automatic stay, the stay still applies and voids the actions.  As the clerk’s notice suggests, creditors foolish enough to intentionally violate the stay may be liable for actual damages, attorney’s fees, and punitive damages.  Damages for “emotional distress” can also be awarded in appropriate cases.

In a recent, and ongoing case in the Northern District of Georgia, a creditor repossessed a debtor’s car after he filed for bankruptcy. Hambyv. Richard Fouts dba Everybody Rides Auto Sales, LLC.  In April 2022 the Bankruptcy Court assessed a fine of $100 per day until the car is returned; as of a July 15, 2022 Court order, the car had not yet been returned, resulting in a fine of more than $9,000 and counting, in addition to the debtor’s attorney fees, plus a requested $29,465.06 in punitive damages, and $1,133.46 for loss of the debtor’s personal property that was in the vehicle when repossessed.

Another creditor in the Southern District of Georgia repossessed a debtor’s car while she was inside a store shopping with her children. Carter v. Guthries Motors, Inc.  When the debtor informed the creditor she was in a bankruptcy case, the creditor held the car for two days, demanding various documents and finally playing the “my fax machine doesn’t work and I lost my email password” game for further pointless delay.  Although she eventually recovered the car, the creditor’s actions caused the debtor and her family a loss of work and to miss important medical appointments.  The Court ordered the creditor to compensate the debtor $110 for lost wages and out-of-pocket expenses, and $990 in punitive damages.  The real winner – as is often the case – was the debtor’s attorney, who was awarded $8,600 from the creditor for the work needed to enforce the stay and to pursue damages for violating the stay. 

A stay violation doesn’t have to be as dramatic as an unlawful repossession, eviction, foreclosure or wage garnishment.  Even persistently contacting a debtor about a debt owed at the time the bankruptcy case was filed is enough to trigger a stay violation.  (This is the reason why you’ll frequently hear warnings on automated messages that go something like: “This may be an attempt to collect a debt…unless you’re in bankruptcy, in which case this is just for ‘informational purposes’.”)  As a practical matter, it’s a bad idea to run to the bankruptcy court to report a stay violation every time you’re contacted by a creditor.  Many times, those contacts are inadvertent, and if you or your attorney advise them of the bankruptcy case the activity will stop.  While, as we’ve seen above, bankruptcy courts take stay violations seriously, most courts will discourage “gotcha!”-style behavior.  One routine phone call from a creditor isn’t likely to result in damages, but repeated contacts after warnings is a different story. 

If you’re in a bankruptcy case and receiving unwanted contacts from a creditor, advise the creditor of your bankruptcy case, including your case number, and notify your attorney right away.  It’s best to document the contact so that you will be able to prove the creditor received notice, in case the conduct persists.  IN most cases, one warning is enough to stop the activity.

If you’re a creditor and someone informs you they’re in a bankruptcy case, it’s important to take that information seriously.  The safest course will always be to ask an attorney to review the situation before taking any further action.  If you are aware that someone is in a bankruptcy case and you’re thinking about disregarding that fact: For heaven’s sake, Don’t Do That! 

If you do decide to violate the bankruptcy stay, you’re probably going to enrich a bankruptcy attorney.  While debtors’ attorneys are often excited about new ways to make money, we mostly want our clients to be left alone.  Debtors and creditors make bad decisions, but sometimes attorneys do, too, as we’ll see in the next blog post.  Until then, be happy, be safe, and spend wisely.  The 7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit my website at narmorelawoffice.com for more information.  Narmore Law Office LLC is a debt relief agency and helps people file for relief under the United States Bankruptcy Code.