Section 362(a) of the U.S. Bankruptcy Code provides that the filing of a bankruptcy petition automatically stays (stops) any action by a creditor to collect on delinquent bills. A stay is effectively an automatic court order that tells the debt collector to stop all debt collection activities against the bankruptcy petitioner. The automatic stay also stops many civil lawsuits against the petitioner.
As Stephen P. Parsons points out in The ABCs of Debt, the automatic stay dictates that all of the following actions against a debtor must stop:
- Informal debt collection efforts against the debtor.
- Pending debt collection lawsuits.
- Efforts by creditors to collect on final judgments rendered against the debtor.
- Efforts by creditors to obtain a security interest in the debtor’s property.
Filing for Bankruptcy Stops a Foreclosure
In addition to the actions listed above, the Bankruptcy Code also provides that all efforts to repossess or foreclose on the debtor’s house pursuant to a lien must stop once the petition for bankruptcy is filed. This is true regardless of whether the debtor files under Chapter 7, Chapter 13, or any other chapter of the Code.
Why Does the Bankruptcy Code Include an Automatic Stay?
The rationale behind the automatic stay provision is that the debtor who files for bankruptcy is presumed to be immediately entitled to the protections of the Bankruptcy Code upon filing. Of course, when it comes to Chapter 7 bankruptcy, another reason for the automatic stay is to keep as much property as possible within the bankruptcy estate for the eventual liquidation and distribution to creditors pursuant to the Code.
What Happens if Debt Collectors Violate the Bankruptcy Stay?
A creditor who continues collection efforts against the debtor after having been given notice of the commencement of a bankruptcy case may be found in contempt of court. The bankruptcy court has the power to enjoin continuing collection efforts and to impose fines and penalties on the creditor. The creditor may also be ordered to pay the debtor’s attorney fees associated with the continued collection efforts. And, as Parsons notes, § 362(k) of the Bankruptcy Code even authorizes the imposition of punitive damages for a willful violation of the stay.
If a creditor has not received actual notice of the debtor’s filing of a bankruptcy petition, the bankruptcy court may not hold the creditor in contempt for continued collection activities. This is because, absent actual notice of the bankruptcy, the creditor’s actions are not considered willful. Nevertheless, according to Parsons, the court may set aside any actions the creditor has taken since the filing of the bankruptcy petition.
Although filing for bankruptcy works to automatically stop debt collectors from contacting a debtor, the stay is only temporary and, in some instances, may be lifted at the request of a creditor. There are many issues to be considered before deciding to file for bankruptcy, and stopping debt collectors in the short term is only one of them. Because of the complexities involved in filing for bankruptcy, one should seek the advice and counsel of an experienced bankruptcy attorney.