Law Offices of Nicholas Gebelt

When Can A Debtor Sue A Creditor For Attempting To Collect A Debt In Violation Of The Automatic Stay?


Theoretically, any time a creditor has violated the automatic stay, the debtor can sue the creditor. However, in practice things are a little more complicated.

Let’s start by defining the automatic stay in two parts.

What is a stay? In law, a stay says stop. Whatever is stayed must stop immediately.

The filing of a bankruptcy petition under any chapter immediately stays all actions by creditors against the debtor, the debtor’s possessions, and the bankruptcy estate that is created upon filing the petition. The debtor doesn’t have to do anything else, so the stay is called the automatic stay. Once the stay is in place, any actions by a creditor are void ab initio. Moreover, the creditor can’t call the debtor, send bills or letters to the debtor, sue the debtor, repossess or foreclose on assets of the debtor or the estate, or garnish wages. In essence, the stay erects a legal brick wall around the debtor as protection from the depredations of creditors.

If a creditor violates the stay after it has received clear notice, the debtor can sue the creditor to recover actual damages, including costs and attorney’s fees, and in appropriate circumstances punitive damages. One exception: If the violation was against the bankruptcy estate in a Chapter 7, the Chapter 7 Trustee rather than the debtor is the one who has standing to sue the creditor.

A stay violation is contempt of the order for relief that is entered upon the filing of the petition. Therefore, the appropriate way to deal with it is to file a motion for an order to show cause why the creditor should not be held in contempt for violating the stay.

However, some judges take the position that if the debtor is seeking monetary compensation, the debtor must initiate an adversary proceeding. Their logic is that if you’re asking for money, Rule 7001(1) of the Federal Rules of Bankruptcy Procedure requires an adversary proceeding.

The debtor can certainly initiate the adversary proceeding right away. However, in practical terms, you are not going to get very far if there has been just one violation of the stay — unless it’s an egregious act such as seizing a large amount of money in a bank account, or conducting a foreclosure sale. The creditor may claim that it never got notice of the bankruptcy filing, so it was not aware that the stay was in place. Therefore, I prefer to give the creditor enough rope to hang itself.

I send a nice letter to the creditor, via fax, email, and U.S. Mail. The letter is not confrontational in tone, but is firm. It tells the creditor that my client has filed a bankruptcy petition, and that the automatic stay is in place. It describes the violative actions of the creditor, and states that the actions were a violation of the stay. The letter firmly, but politely, asks the creditor to cease all stay violations. I include a copy of the Notice of Filing, a copy of the voluntary petition, and copy of the stay violating documents — usually a bill.

I also make a friendly and polite phone call to the creditor’s office, asking the creditor to stop the violations.

I do these things for a couple of reasons. First, it’s possible that the creditor never received the notice of filing, so it doesn’t know that my client has filed a bankruptcy petition. Therefore, my communications allow the creditor to correct an innocent and honest mistake, without stirring up any rancor.

Second, I do this to create a paper trail of the violation, and to establish that the creditor knows about the stay. If we eventually have to litigate the matter, I can show the judge that we tried to resolve the problem without getting the Court involved. I can then ask the judge, “What more could we have done?”

This works to our benefit strategically. If I just go in hard and hot, both guns blazing, at the first bill that comes through the mail, I run the risk of alienating the judge. However, if I try to resolve the matter before going before the judge, and the creditor continues to violate the stay, I’m much more likely to have the judge on my side to sanction the contumacious creditor.

I’ll usually go through this process a couple of times, rather than jump the gun after a creditor’s second violation because the bills may be automatically computer-generated, and not willfully sent out. But if I’ve called twice, I’ve sent letters twice, and the creditor keeps violating the stay, I will seek relief, and I’ll have a compelling case with which to do so.

Thus, while the first violation is a violation just as much as a subsequent one, you can’t get damages unless you show that the violation is willful, that you’ve done everything you could to get the creditor to stop, and that the creditor shows no signs of stopping without intervention.

When it comes to what damages and relief we can actually seek, it all depends on whether my client is an individual debtor or a business debtor. For individuals, Section 362(k) of the Bankruptcy Code says that the debtor is entitled to actual damages, including costs and attorney’s fees, and in appropriate circumstances, punitive damages.

The provision in Section 362(k) only applies to personal debtors, and does not extend to business debtors. However, there is a provision in Section 105 of the Bankruptcy Code that gives the judge equitable powers to sanction bad behavior.

For more information on Suing A Creditor For Attempting To Collect A Debt In Violation Of The Automatic Stay, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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