When a person or business files for bankruptcy, it triggers an automatic stay, a legal requirement (injunction) that all creditors cease trying to collect overdue sums or to seize property for nonpayment of bills. This legal protection of debtors must be obeyed by creditors or they could face penalties.
If you are a creditor, knowing your place in a bankruptcy proceeding is critical. An experienced business bankruptcy attorney can be your guide to understanding your role and your rights. Making an error can result in court sanctions.
What You Need to Know About Bankruptcy
The debtor who files for bankruptcy is protected by the automatic stay, which includes an immediate cessation of:
- Wage garnishment
- Phone calls about collecting past due amounts
- Lawsuits seeking repayment of debts
- Foreclosure actions
- Repossession activity
- Mail or email about debts owed
Failing to stop all collection attempts during bankruptcy can result in serious court sanctions, including damages and civil contempt of court.
Certain debts cannot be discharged through bankruptcy. The automatic stay only applies to some, like taxes, while debts owed as a result of family court actions are not subject to the stay. In general, debts that are not discharged through bankruptcy include penalties assigned by criminal courts, child and family support payments ordered by family court, most student loans, and most taxes.
The consequences for ignoring a stay may include attorney fees and escalate to punitive damages if the court finds that continuing to send collection letters and making calls is a willful violation. This is possible even if the creditor claims the message was sent in error.
Avoid these common mistakes:
- Automated Billing
Failing to stop automated billing notifications when a bankruptcy notice has been received can be a violation of the automatic stay. Since the stay requires that all collection actions must immediately stop, even an automatically-generated bill violates that provision.
- Pursuing collections actions
During the automatic stay period, any collection or repossession activity, even if previously scheduled, must stop. Levying bank accounts, foreclosure sales, and the like can be invalidated if carried out without the court’s permission. An opportunity to seek the court’s permission is a motion for relief from the automatic stay.
- Misunderstanding the limits of the stay
Automatic stays are finite. Understanding the limitations of stays and the types of creditors they apply to is important.
- Notice requirements
In Wisconsin’s bankruptcy courts, notices may be sent out to creditors by court clerks but it is up to the creditor to track and act on that notice.
One way to avoid the pitfall of continuing to seek payment of a debt in violation of an automatic stay is to create strong internal systems for identifying and acting upon bankruptcy notices.
Wisconsin bankruptcy experts note that the automatic stay is effective immediately upon filing, even if the creditor has no actual knowledge of the bankruptcy. This underscores the importance for Wisconsin creditors to have strong internal systems for identifying and acting on bankruptcy notices.
When a bankruptcy filing prevents a creditor from protecting their interest, the creditor may ask the bankruptcy court for permission to continue specific actions related to collections. This requires filing a motion for relief from the automatic stay. Creditors seek relief when collateral is not being insured or maintained, when the debtor has no ownership value (equity) in the property, or when delaying action would cause financial harm. If the court grants the motion, the creditor may resume approved collection actions or enforcement actions, such as foreclosure or repossession, with the court’s permission.
Staying on the Right Side of Automatic Stays
It’s critical for the health of your business to comply with the requirements of automatic stays. An experienced business attorney from Kerkman and Dunn can help you understand your role in debtors’ bankruptcies and advise your collections practices. Call for a consultation.
