In pursuing the orderly administration of unpaid debt in bankruptcy, the person in charge of the assets of the debtor is called the trustee. The trustee is faced with the difficult task of balancing the inherently conflicting interests of the debtor and his creditor. In order to complete this task expeditiously, bankruptcy law calls for the suspension of most non-criminal proceedings against the debtor. This allows the bankruptcy to proceed in a manner unencumbered by uncertainty caused by continued collection attempts. This suspension of proceedings against the debtor is called the automatic stay. It commences upon the filing of a petition for bankruptcy and essentially marks the end of the creditor's ability to pursue collection of a debt through means other than the bankruptcy proceeding. The automatic stay is tantamount to a court order and, thus, violation of the automatic stay by creditors can have serious repercussions.
Violation of the Automatic Stay
Attempts to repossess property, suits in court and other actions taken in violation of the automatic stay are generally void. In other words, they are given no legal effect. For example, normally, when a person defaults on a car loan, the lender may repossess the car. A creditor who repossesses a car after the automatic stay has commenced, however, must return the car and cease all attempts to collect payment until the automatic stay is lifted. Whether any penalty is imposed on the creditor in violation of the stay depends on whether the creditor willfully ignored the stay.
Until 1984, the only means of enforcing the automatic stay was the imposition of sanctions for contempt of court. Today federal bankruptcy laws provide a private cause of action for an individual injured by any willful violation of the automatic stay. The injured individual is entitled to recover actual damages, including costs and attorney's fees. Also, it is not only the debtor who may be harmed by the violation of an automatic stay: other creditors may be effected by the confiscation of property on which they have an interest. These creditors may be entitled to damages as well. What has been a matter of differing opinion among courts is whether a corporation can be considered an "individual" who may be injured by the willful violation of an automatic stay. Generally speaking, it is not unusual to include corporations in the legal definition of the term individual, but courts differ on their interpretation in this particular instance.
An award of actual damages requires a showing of injury or loss stemming from acts in violation of the stay. Some examples of acts that have repeatedly supported an award for actual damages are repossession of a debtor's vehicle, locking a debtor/tenant out of a leased space, filing a state court action against a debtor, and continued efforts at the collection of debts owed before filing bankruptcy. Punitive damages are awarded when the actions taken by the creditor are particularly egregious and there is a showing of actual damage.
Occasionally, the violation of the stay may not cause any actual harm. For example, if a creditor who repossesses a property in violation of the stay would have ended up with the property at the end of the stay, no injury has occurred. A safer approach for the creditor, however, is to request that the court lift the stay, rather than to take the matter into his own hands.
Similarly, when the violation is purely technical in nature, such as when bankruptcy has been filed, but notice of the stay has not yet been received, courts have been reluctant to award damages. In other words, the debtor typically may only recover damages based on a willful violation of the stay. Willful violations are those done deliberately and intentionally with knowledge of the automatic stay. A creditor gains knowledge of the automatic stay by oral or written notice of the stay or, since the stay begins automatically upon the filing of a petition for bankruptcy, upon notice of those proceedings. In the event that a creditor inadvertently violates the stay, the creditor must return the property immediately upon notice of the stay. Failure to do so will likely be held a violation of the stay.
In some cases, there may be no harm done by the creditor's action except that the debtor was forced to assert his rights under the automatic stay in court. Such cases have resulted in the award of attorney's fees associated with enforcing the stay. Damages may be awarded not only against the creditor, but against the creditor's attorney as well, if the violation of the stay occurred through the fault of the attorney.
When the creditor violating the automatic stay is a government entity, generally, the entity must return confiscated money or property, but may not necessarily be required to pay damages or attorneys fees.
By stopping all collection efforts, all harassment, and all foreclosure actions, the automatic stay gives the debtor "breathing room" from his creditors. But, the automatic stay also protects creditors. Without it, certain more aggressive creditors would be able to pursue their own remedies against the debtor's property, possibly damaging the interest of other creditors. In general, bankruptcy seeks an orderly liquidation procedure under which all creditors are treated equally. For this reason, willful violations of the automatic stay are not tolerated. If you are a creditor, a bankruptcy attorney can help you plan ahead before actions are stayed, or help you to negotiate some exceptions to the stay. If you are a debtor, a bankruptcy attorney can help you enforce your rights under the automatic stay.