The Automatic Stay.
It is one of the greatest and most powerful provisions of the Bankruptcy Code. If sections of the Bankruptcy Code were literary characters, the Automatic Stay would be a superhero.
The Automatic Stay comes from section 362 of the Bankruptcy Code. Section 362 provides that the commencement of a bankruptcy case stays pretty much any action that creditors can take against a debtor or the debtor’s property.
So, actions to collect a debt? Stopped.
Wage garnishments? Stopped.
Telephone calls to collect? Stopped.
And, importantly for the way that I practice, attempts to record or perfect a lien on property? Stopped.
When we file a bankruptcy petition, every creditor receives a notice that the case has been filed. And so all creditors become aware of the bankruptcy case and therefore should cease collection activity except through the bankruptcy court.
Do they? Usually. The vast majority of creditors try to obey the law.
But not all do.
When creditors don’t stop their collection efforts, if they continue to call or send letters, they are subject to sanctions. Section 362(k) of the Bankruptcy Code provides that an individual debtor may recover damages from a creditor who violates the stay. So when we see that a creditor has, for example, made telephone calls that violated the stay, we might bring an action for damages.
This includes a supposedly secured creditor that didn’t document its loan properly and tries to get the infirmities resolved post-petition. In these days of securitized mortgages, many banks in the mortgage industry discover after a bankruptcy petition has been filed that there are problems with the documentation of the mortgage. Those problems simply cannot be fixed after the bankruptcy case has been filed.
When a secured creditor tries to fix problems with the documentation, whether by transferring an interest, trying to record an assignment, or any other action that should have taken place long before, that creditor is subject to the same kind of suit for damages that the creditor who made an improper telephone call.
Which brings me back to the title of this post. I used to do a lot more work on the creditor side of cases. I understand the pressures that creditors’ lawyers face. No one wants to be the lawyer who made a goof and subjects his or her client to a stay violation. In fact, under some circumstances not only is the client liable, but the lawyer’s firm would be as well.
So I used to worry a lot about the implications of the Automatic Stay. Then I started representing debtors.
And now it doesn’t bother me at all.