Creditors’s Responsibilities After Bankruptcy Filing

On the bankruptcy petition is filed, the bankruptcy automatic stay is in effect in Chapter 7 and Chapter 13 bankruptcies, and virtually every type of collection activity is called to a halt. The bankruptcy court enters an order under 11 U.S.C §362, which prohibits nearly all creditors from taking any type of collection action.

What happens if the bankruptcy automatic stay is violated? If a creditor violates the automatic stay by accident, it must return the money or stop the collection action as soon as it learns about the bankruptcy. However, if the stay violation is done by the creditor on purpose, and if it is considered a “willful” violation, and substantial penalties can apply. In the event of an intentional violation of the bankruptcy stay, the Bankruptcy Code provides strong remedies for the debtor. After a willful stay violation, the debtor can recover not only the money or property that was wrongfully taken, but may also be entitled to attorney fees and even punitive damages.

Since automatic stay applies to all collection activities, with some very limited exceptions, even collections related to unpaid taxes must stop. A recent case of In re Voll, Case No. 13-31058 (N.D.N.Y. 2013), the bankruptcy court held that the New York State Department of Taxation and Finance committed a willful violation of the automatic stay after it had failed to vacate an income execution on debtor’s employer.

The following facts were undisputed. Prior to commencement of the case, the Department of Taxation served an income execution on debtor’s employer, which resulted in the weekly garnishment of debtor’s wages to satisfy a 2012 tax warrant. Subsequently, on June 7, 2013, debtors tiled Chapter 13 bankruptcy. On that same day, debtors’ counsel sent a letter to the Department of Taxation notifying it of the bankruptcy filing and requesting that the referenced income execution be lifted. Debtors scheduled the Department of Taxation as a creditor in their bankruptcy schedules and referenced the outstanding tax warrant.  The Department of Taxation was properly listed at the address designated by the Department for receipt of all bankruptcy notices. On June 9, 2013, the Bankruptcy Noticing Center sent the Department of Taxation an official notice of commencement of the case, which the Department admits receiving on June 12, 2013.

Six days later, on June 18, 2013, the Department of Taxation mailed its release of the income execution to the debtor at her residence and to her employer at a post office box in Evansville, Indiana. The mailed release was the first and only document provided by the Department to debtor’s employer to cease the garnishment of Debtor’s wages. After mailing the release, the Department of Taxation took no additional actions.

Notwithstanding the Department being on notice of debtors’ June 7 filing and its issuance of the release; the garnishment of debtor’s wages continued from paychecks issued on June 14, June 21, June 28 and July 5, 2013. The Department was not aware of the continuing post-petition garnishment of debtor’s wages on its behalf until debtors tiled their motion seeking to find the Department in willful violation of automatic stay. Upon receipt of the motion, the Department promptly returned the funds improperly deducted from debtor’s post-petition wages.

The bankruptcy court found that the Department’s acts and omissions constituted a willful violation of the automatic stay. The court stated that it is creditor’s duty to ensure that the garnishment ceases, and that the Department, by waiting for six days before mailing the release to debtor’s employer and failing to make sure that the release was received and followed, had violated automatic stay.

The lesson from Voll is that creditors have their responsibilities once the debtors file for bankruptcy.  They have to take affirmative actions to ensure that the automatic stay is not violated and they cannot passively thwart a federal injunction of which one has knowledge by sitting back and allowing acts that are enjoined to continue. When a debtor’s wages are subject to garnishment, the creditor must take immediate action to effectively address its termination.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.