Recovering Damages from Creditors Who Violate the Bankruptcy Stay
The automatic stay created by a Chapter 7 or Chapter 13 filing functions as the core protection of consumer bankruptcy. With limited exception, all creditor action must stop as soon as your bankruptcy is filed. Creditors who ignore the automatic stay do so at their peril as bankruptcy judges react quickly and decisively against creditors who do not honor this basic protection.
Creditor violations of the automatic stay can give rise to actions for damages within your bankruptcy case. If you are harmed significantly, you can collect actual and sometimes punitive damages against violating creditors.
What is a Stay Violation?
Most stay violations occur when a creditor continues to harass you for payment after you have filed your bankruptcy, or when a creditor refuses to dismiss a pending lawsuit after your filing. Some bill collectors mistakenly believe that they are not subject to the automatic stay associated with your bankruptcy filing if they have not received notice, or if a notice of the bankruptcy filing is not filed in the state court where their action is pending.
The law relating to the automatic stay is clear – the instant you file your case (and this could be at 1:43AM on a Sunday morning) the automatic stay goes into effect. All creditors are bound by it.
Generally, bankruptcy judges will not award damages against a creditor who unknowingly continues collection or judgment enforcement action against you when that creditor does not have actual knowledge of the bankruptcy filing. This leniency will not apply if the creditor has actual knowledge of the bankruptcy case filing – i.e., if you can prove that you have faxed or verbally advised the creditor about your filing.
When I file a bankruptcy electronically, the court system generates an official notice of filing. I always provide a copy of that notice to my clients and either they or I will fax or email the notice to creditors.
My experience has also been that bankruptcy judges will assume that written notice has been received within four or five days after the filing, so the “we did not know about the filing” defense will not hold up for too many days.
Evidence Needed to Prove a Stay Violation as well as Damages
My experience has been that most bankruptcy judges are very bright people and they will see through an attempt by a lawyer or debtor to “set up” a creditor. Further, judges expect that bankruptcy counsel will make a determined effort to give notice to a relevant person in the creditor’s main business office. Therefore, I make every effort to provide notice to as many creditor business addresses as I can – if a creditor receives notice at five addresses, it will be difficult for that creditor to argue that it did not have notice. I will also attempt to give notice by phone call. Notice, by the way, can be “actual” or “constructive.” Constructive notice means that a bankruptcy case filing notice was sent by the clerk to an actual address occupied by a creditor. You do not have to prove that someone opened the letter.
If a creditor persists in engaging in actions that violate the stay, you will also need to prove damages. I have represented clients in stay violation actions in which we introduced evidence of mental health counseling and proof of lost time from work. Generally judges will be reluctant to award punitive damages if there are no actual damages.
Finally, be aware that the Bankruptcy Code sets out several situations in which the automatic stay does not apply – for example, actions by a custodial parent to collect child support will not be subject to the stay, most criminal prosecutions will not be stayed, and the stay may not apply in a second or third case filing within a year. All of these exceptions will be explained by your lawyer, but be aware that they are out there.
