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Beware Violating An Automatic Stay

Once a debtor files for bankruptcy, the court places an automatic stay that prohibits creditors from taking further collection actions. However, some creditors do not always heed the automatic stay. Usually, this is not deliberate; it is simply because the creditor does not realize that the court has placed a stay.

After a creditor files a bankruptcy petition, there is usually a short lag before creditors receive notice. In the interim, they sometimes accidentally send collections notices. But violating an automatic stay, even inadvertently, can have significant legal ramifications that creditors should take care to avoid.

What happens when creditors violate a stay?

Usually, violations are not actionable. After all, creditors can claim that they were ignorant of the stay. But this does not prevent some debtors from taking legal action against their creditor.

Small and medium creditors must be particularly alert to automatic stays. While most large institutions have systems in place to alert them when stays go in place, smaller creditors might not. If they continue to take collection action, then they may be held accountable for contacting the debtor.

If the court does hold a creditor accountable for contacting someone in violation of an automatic stay, the penalties can be severe. They may include:

  • Returning confiscated property or assets
  • Compensating debtors for damages. These can include financial damages, or damages like pain and suffering.
  • Paying a civil fine

All creditors must know their rights

If a debtor does take legal action, then credits must uphold their rights. A civil suit could harm a company's reputation, run up expensive fees and affect their future success. Many creditors choose to seek legal counsel to ensure that they fully comply with bankruptcy law. That helps them avoid violating automatic stays--deliberately, or accidentally.

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