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Dealing with the automatic stay when your debtor files bankruptcy

The federal automatic stay in bankruptcy is a powerful tool that protects a debtor in active bankruptcy. There are aspects of the stay creditors should know about before proceeding against a debtor to avoid violating it and incurring penalties.

What is the automatic stay?

The automatic stay is a keystone of federal bankruptcy law found in 11 U.S.C.A. § 362. It is an injunction stopping any act to collect, enforce or perfect a debt owed by the bankruptcy filer, effective at the moment the petition is filed with the court.

Once bankruptcy is filed, collection efforts must cease, including any contact with a debtor by phone or mail. This includes renters or homeowners who are delinquent. When bankruptcy is filed, all property interests and assets owned by the debtor are placed into the bankruptcy estate and controlled by the trustee. The trustee values the assets, examines the debtor’s the South Carolina exemptions, then liquidates and distributes non-exempt assets to the creditors listed in the petition. If your debtor has filed a chapter 13 or 11 reorganization case, you will file a proof of claim with the court outlining the debt owed to ensure you are part of the debtor’s payment plan and receive notice of any action that may impact your interest as a creditor.

The stay against the person and the estate

The tricky aspect of the automatic stay that most creditors are unaware of or become confused about is that the stay applies in two ways to the debtor. There is an automatic stay stopping collection efforts against both the individual and the bankruptcy estate containing the debtor’s property interests. Thus, to move forward in a repossession or foreclosure the stay has to first be lifted by the creditor in a federal bankruptcy court hearing. It also halts the filing of a UCC 1 with the Secretary of State in order to perfect your lien if this has not yet been done or if the filing has expired.

The stay, as it relates to the person, prohibits filing a court action or judgment against a debtor with an active bankruptcy case. In order to initiate an eviction proceeding for either a renter or a holdover tenant after foreclosure of a home, the automatic stay must be lifted by bringing a motion in bankruptcy court.

What creditors can do

It is important that you take notice of bankruptcy filings seriously and halt your collection efforts immediately. You should be checking for active bankruptcies prior to a foreclosure sale or sale of repossessed property to avoid having to cancel the sale after it takes place. The same goes for checking for bankruptcy prior to filing a state court judgment against the person or their property.

Once an active bankruptcy is discovered, you can file a motion for relief from the stay. If it is a chapter 7 liquidation and you are a secured creditor, you can wait until the trustee abandons the property, the debtor is discharged, and the case is closed, then continue repossession efforts.

Once the bankruptcy case concludes, you can recover secured property, but because of the permanent injunction that protects the discharged debtor, you cannot seek repayment from them.

Violations

A violation of the automatic stay does not have to be done knowingly to incur penalties. This is why is it is important to check for active bankruptcies prior to proceeding. Any acts taken while the stay was in in effect are considered void. In other words, there will be no legal effect.

A willful violation of the automatic stay leaves you liable for damages, including costs and attorney fees and in some circumstances, on the hook for punitive damages. Willful means that you knew that the stay was in effect and you still acted to collected the debt.

In order to protect your collateral and investments, when dealing with insolvent debtors it is very important to discuss your options with experienced counsel who are knowledgeable about debt collection in your state.

 

 

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