You’ve likely heard that bankruptcy will immediately stop harassing creditor calls and other collection actions. It’s true. When you file a case, an order called the “automatic stay” goes into effect prohibiting creditors from taking steps to collect money from you. Most importantly, the law has teeth. You can bring a violating creditor before the bankruptcy court to face the consequences.
What Is the Automatic Stay?
When you file for bankruptcy, most pending and ongoing debt collection actions must come to a stop. Not only does the stay prohibit telephone calls and letters, but it also extends to creditor lawsuits for nonpayment of debt and wage garnishments that deduct money from your paycheck.
What Doesn't the Automatic Stay Cover?
The stay doesn’t prohibit all adverse actions and exceptions exist. For example, the following can continue:
- certain family law matters, including the collection of child or spousal support
- a criminal action against you
- certain eviction actions (depending on the law of your state), and
- some tax-related measures, such as an audit.
Also, because you remain responsible for debt incurred after filing for bankruptcy, creditors can collect on those matters, even if your bankruptcy case remains open.
Can a Creditor Lift the Automatic Stay?
Yes. A creditor can ask the court to lift the automatic stay, and in most cases, the court will grant the request if doing so won’t siphon bankruptcy funds away from another creditor. For instance, the court might allow a government agency to continue an action for an alleged environmental pollution claim.
It's also common for the bankruptcy court to allow a car lender to continue with repossession or a mortgage lender to proceed with foreclosure when the filer is behind on payments and there isn’t enough equity in the property to cover the outstanding balance. These creditors have an advantage because car and mortgage lenders have "secured claims" which are created when the borrower voluntarily agrees to give the lender a lien against the property.
The lien entitles its holder to recover the property if the debt isn't paid, and to receive full payment before other creditors receive anything, and a voluntary lien isn't eliminated in bankruptcy.
Does the Automatic Stay Always Go Into Effect?
No, the stay might not go into effect at all if you’ve filed multiple cases within the previous year. Filing another bankruptcy might not provide any creditor protection.
If you’re facing a lawsuit or foreclosure, or you’ve filed numerous bankruptcy cases, it's best to talk with an attorney about the effectiveness of the automatic stay before filing your case.
What Constitutes a Violation of the Automatic Stay?
Creditors rarely violate the stay—at least not on purpose because they’re aware of the consequences of ignoring the court’s order. So if you receive a collection call after you file for bankruptcy, it’s likely an accident. But it's also a violation of the automatic stay.
What You Can Do If A Creditor Violates the Automatic Stay
First, you’ll want to check that you included the debt on your bankruptcy petition. You have an obligation to ensure the creditor knows about your case, and you do so by listing all debts in the paperwork you file with the court. If the creditor isn’t on the list, contact an attorney to correct the problem. Otherwise, you might remain responsible for the obligation.
If you correctly listed the debt, it’s still likely that the contact was inadvertent. To prevent future calls, give the creditor the information it will need to verify that you indeed filed for bankruptcy. Here’s what you’ll provide:
- Your bankruptcy case number.
- The date that you filed for bankruptcy.
- The court where you filed your case.
You can find this information on any document sent to you by the court, such as the notice of case filing—one of the first documents that you and your creditors receive. For instance, a common notice is the Notice of Chapter 7 Bankruptcy Case—No Proof of Claim Deadline.
You’ll find the information in the box at the top of the form. The creditor can use it to access the online bankruptcy filing system known as "Pacer" to verify your filing and the automatic stay.
Consequences for Continued Creditor Violations
Although the creditor isn’t likely to call back, it can happen. If you do receive another call, you’ll have ammunition to take action because creditors face liability for damages to debtors for automatic stay violations.
You can seek actual damages, punitive damages, attorney's fees and costs when a creditor willfully violates the automatic stay. All you must prove is that the action is willful and that the law provides compensation.
Proving a Willful Automatic Stay Violation
A willful violation occurs when the creditor has reason to know of the bankruptcy filing and contacts you anyway. Willful means that the creditor knew the stay was in effect. If you previously gave the information necessary to verify that you filed for bankruptcy during the first call, you’ll likely have all the evidence that you’ll need to prove a violation if you receive a second call.
Hiring a Bankruptcy Lawyer
Holding the creditor accountable might or might not be something that you feel comfortable doing yourself. If you’re not familiar with the court process, you’ll want to contact a bankruptcy lawyer. The attorney will help you decide the best action to take. It will include filing either a motion that asks the judge to issue an “order to show cause” requiring the creditor to explain the behavior, or a lawsuit.
The steps the attorney recommends will depend on the extent of the harm and if you are likely to receive money as a penalty. The greater the chance that the attorney can get a large sum, the more likely the attorney will consider filing an action.