Bankruptcy and the Automatic Stay

by Hermin Dowe on April 30, 2014

Recent Court Opinion On Creditor Obligations and Court Violations

One of the benefits of filing for bankruptcy is that a debtor becomes entitled to the protection of bankruptcy’s automatic stay. The automatic stay takes effect upon the filing of a petition for Chapter 7 or Chapter 13 Bankruptcy and prevents creditors from taking certain actions such as:Dowe_blog301414

  • Repossessing the debtor’s property;
  • Taking action to create or enforce a lien on the debtor’s property;
  • Beginning judicial proceedings against the debtor; and
  • Exercising a set-off to pay debts.

The automatic stay can stop a debtor from being foreclosed, evicted, or having their vehicle repossessed. Unless a creditor successfully files for a petition to lift the automatic stay, it will remain in effect for the duration of the bankruptcy. In a Chapter 7 Bankruptcy, this may last for about 3 to 6 months, and in a Chapter 13 bankruptcy the stay can last as long as 3 to 5 years. One of the benefits of the automatic stay is that it gives a debtor who may have been continuously hassled by his or her creditors the chance to breathe and to formulate a plan for their finances.

If a creditor ignores the automatic stay, the debtor can be entitled to any damages he or she suffers.  And for willful violations of the automatic stay, section 362(k) of the bankruptcy code provides that a debtor can recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, the debtor may recover punitive damages.

As shown in the recent Ninth Circuit Bankruptcy Appellate Panel decision in In re Wallace, a creditor also has an affirmative duty to remedy their violation of the automatic stay. This means that if, for example, a creditor inadvertently violates the automatic stay and repossesses a car, they must return the vehicle as soon as they realize the automatic stay was in effect.

Ninth Circuit BAP Decision in In re: Wallace

The Ninth Circuit Bankruptcy Appellate Panel’s decision inIn re: Wallace is an excellent example of how bankruptcy’s automatic stay can be used to protect a debtor’s car from repossession. Wallace purchased an automobile from a company called Carcredit and agreed to make a down payment of $1,000 and 48 monthly payments of about $300. Although Wallace paid a portion of the down payment, he never made another payment on the car. Instead, he declared bankruptcy.

Without knowing that Wallace had declared bankruptcy, Carcredit repossessed the car. The next day, Wallace wrote Carcredit a letter advising them that he had filed bankruptcy and that the car was protected by the automatic stay, but Carcredit refused to return the vehicle.

The Bankruptcy Court ruled in Carcredit’s favor and annulled the automatic stay because Wallace did not offer reassurances that he would resume payments. Further, the District Court held that Wallace was not entitled to damages under bankruptcy code section 362(k) because Carcredit’s violation of the automatic stay was not willful.

On appeal, the Bankruptcy Appellate Panel held that even if Carcredit’s initial repossession of the vehicle was not a willful violation, their failure to return the car to Wallace was a willful violation. A creditor who violated the automatic stay has an affirmative duty to correct their violation. Because of this, Wallace was entitled to damages that he suffered, including his attorney’s fees.

For help with bankruptcy issues in Contra Costa, Solano, Alameda, or nearby counties, please contact the bankruptcy law firms at Dowe Law today.

facebooktwittergoogle_plusredditpinterestlinkedinmailby feather