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3 FAQs for secured creditors about the automatic stay

Those in the business of offering funds to help others pursue business interests can face many ups and downs. Creditors can share in the triumph of a successful business endeavor while also feeling the loss of a poorly planned venture.

Unfortunately, whether successful or not, some clients who benefit from creditor's resources fail to make good on the agreed upon deal. When clients refuse to pay, collection efforts may be necessary to ensure the creditor receives the funds that are due.

In some cases, these efforts can be complicated. One such complication involves debtors that file for bankruptcy. If approved, the bankruptcy court generally issues an automatic stay. This court order essentially blocks the creditor from continuing attempts to receive payment from the debtor. Secured creditors attempting to deal with a debtor who has successfully filed for relief through bankruptcy can benefit from the following information.

What is the impact of the automatic stay?

The automatic stay prohibits creditors from a variety of activities that are taken in an attempt to seek payment. These activities include attempts to obtain possession over certain pieces of property, enforce a lien against property and, in some cases, attempts to collect debt from co-debtors.

Essentially, creditors should note that the automatic stay is a broad court order that encompasses most collection activities.

Are there any exceptions?

As with most things in the legal world, there are some exceptions. The legal experts with FindLaw note that exceptions to the automatic stay can exist in the following situations:

  • Post-petition transactions. Essentially, if the debtor makes a transaction after filing for relief through bankruptcy, that transaction may not be protected by the automatic stay and collection efforts may be allowed.
  • Alimony. Collection efforts regarding alimony payments are generally not blocked by the automatic stay.
  • Various legal proceedings. Certain legal proceedings, like criminal proceedings or another action brought by a government authority like the police, are generally not subject to the powers of the automatic stay.

Of course, not all of these exceptions are helpful for most creditors. However, having a thorough understanding of the caveats of the law can help creditors to determine the best way to hold their clients accountable for the funds they borrow.

Can creditors find relief?

An automatic stay is not an indefinite hold on payment. Eventually, the bankruptcy court will move forward with the process and payments will begin.

An additional option that may be available to creditors seeking payment involves filing an action for relief from the stay. This may be an option if the creditor can establish that its interest in the secured piece of property, or collateral, is not protected.

Although this information provides some guidance on how to navigate collection efforts when an automatic stay is in place, it is important that creditors tread carefully. Sanctions for violating the stay can be harsh and can include putting the creditor in contempt and issuing fines. As such, creditors are wise to seek legal counsel to help guide them through the process of collecting from a debtor who has sought relief through bankruptcy and better ensure their business interests are protected.

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