How an Automatic Stay Protects Debtors in Bankruptcy Cases
An “AUTOMATIC STAY” or freeze on all collection activity is triggered the moment you or your business files a petition for bankruptcy. This is a court order for ALL creditors, or their representatives to immediately cease collection activities. If they fail to do so they must explain why they violated the automatic stay to a federal judge and face the music. Among other things, this means a creditor may not sue you to collect a debt outside of the bankruptcy process.
Creditor Pays Dearly for Ignoring Bankruptcy Stay
Here is a recent example. An Alabama debtor owed $1,200 to a creditor. The creditor’s representatives filed a lawsuit in Alabama state court to collect the debt. A few days later, the man filed for Chapter 13 bankruptcy protection. This should have stayed the debt collector’s state lawsuit. Indeed, the creditor received notice of the bankruptcy petition, and the accompanying automatic stay, shortly after the debtor filed his petition.
However, nearly a month later, the local sheriff’s office served the debtor with the creditor’s lawsuit. An Alabama judge subsequently issued a default judgment against the debtor despite the pending bankruptcy case. The debtor then filed a complaint with the federal bankruptcy court. Only at that point did the creditor move to dismiss the state debt collection lawsuit.
But it was too little, too late, as far as the bankruptcy judge was concerned. He ordered the debtor to pay the creditor $2,000 in “actual damages” for violating the automatic stay, an additional $10,000 in punitive damages, and more than $30,000 in attorney’s fees. The federal court overseeing the bankruptcy judge confirmed this award in a March 2015 decision.
The creditor appealed. The U.S. 11th Circuit Court of Appeals, which oversees all federal bankruptcy cases in Florida as well as Alabama, affirmed the two lower courts. The appeals court said there was no question the creditor “willfully violated the automatic stay.” When a creditor files for bankruptcy protection, it is the creditor’s responsibility to cease all litigation outside of the bankruptcy process. Here, the creditor “refused to honor the automatic stay until it was sued” by the creditor. Accordingly, “the costs and attorney’s fees that [the debtor] incurred to halt the violation of the automatic stay and to prosecute his action for damages constitutes an injury.”
The 11th Circuit also said the award of punitive damages—which was nearly five times the amount the creditor sought to collect from the debtor—was also appropriate under the circumstances. The appeals court specifically cited the creditor’s “reckless disregard of the automatic stay by using nonattorney staff to prosecute small claims actions for the admitted purpose of lessening its legal costs.” Punitive damages were therefore necessary to punish the creditor “for its indifference to the law” and to “deter it from committing future similar misconduct.”
Protect Your Rights Against Creditors
This case is a welcome illustration of how federal courts take debtor’s rights under the bankruptcy code seriously. Bankruptcy is designed to offer debtors some degree of immediate relief from creditor harassment. An experienced Miami bankruptcy attorney can help ensure debtors and the courts respect your rights. Contact Miami attorney Julia Kefalinos if you need to speak with someone about your case today.