This article is not intended for anyone who ever anticipates representing a client in bankruptcy court. This is for the lawyer who is opening the mail when a notice of bankruptcy filing lands on their desk. Even if you didn’t choose to come within the bankruptcy court’s jurisdiction, bankruptcy can still be complex and unforgiving. This article is intended to introduce the basics of the automatic stay, which is one of the easiest ways to wind up in real trouble at the bankruptcy courthouse – even if you never intended to go there.

This is how I describe the automatic stay to my clients:

The automatic stay is an order that goes into effect automatically and stays, which is an archaic term meaning temporarily stops, all collection activity against the debtor or property of the debtor.

The Bankruptcy Code describes the automatic stay this way:

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and

(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.[1]

The first thing to notice is that the stay applies to “all entities” (tail end of Subsection (a)). Entity is a defined term in the Bankruptcy Code:

(15) The term “entity” includes person, estate, trust, governmental unit, and United States trustee.[2]

So, basically, the automatic stay applies to everybody, not just parties to the bankruptcy. There is also no requirement that the affected “entity” have notice of the bankruptcy filing.[3] The automatic stay simply applies. To quote the definition I give my clients, “It goes into effect automatically, and it stays all collection activity against the debtor or property of the debtor.”

Most commonly for lawyers, the automatic stay will become relevant if someone who owes the lawyer money, someone who owes the lawyer’s client money or someone who is a party to litigation involving the lawyer files for bankruptcy. Clearly, collection activity must stop. Section 362(a) prescribes attempting to collect on a “claim” in multiple places. A “claim” is also a defined term in the Bankruptcy Code:

(5) The term “claim” means—

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.[4]

In other words, if the bankrupt debtor owes you or your client money, the automatic stay stops you from collecting it. One common misconception is that if you believe your debt is not dischargeable in a bankruptcy, then somehow the automatic stay does not apply. Nowhere does Section 362 limit the automatic stay to nondischargeable claims. Even the IRS and student loan lenders are stopped by the automatic stay.

The automatic stay also applies to stay pending litigation in which the debtor is a party. Section 523(a)(1) is the most common subsection for staying litigation, and it stays all litigation attempting to collect a claim against the debtor. The question then becomes, what happens in cases with multiple defendants? Clearly, the case must be stayed as to the debtor, but what about the other defendants?

The majority rule is that the automatic stay only applies to the debtor.[5] There is a statutory exception to that if the debtor filed a Chapter 13 bankruptcy that extends the automatic stay to co-debtors if the debt involved is a consumer debt.[6] That is not going to apply in most cases, leaving us with the general rule that the automatic stay only stays litigation as to the debtor. There is what is supposed to be a “narrow exception” to that rule that extends the stay to co-defendants “when there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.”[7]

Obviously, there are instances when a bankrupt debtor is a party to litigation, but the litigation is not intended to collect a claim against the debtor. In those cases, each subsection of §362(a) needs to be read carefully with the specific facts in mind, but continue reading into §362(b) because just as Subsection (a) lists when the stay applies, Subsection (b) lists when the stay does not apply.

There are quite a few subsections listing fact patterns when the automatic stay does not apply. Of those, the first ones are the most common:

(b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay—

(1) under subsection (a) of this section, of the commencement or continuation of a criminal action or proceeding against the debtor;

(2) under subsection (a)—

(A) of the commencement or continuation of a civil action or proceeding—

(i) for the establishment of paternity;

(ii) for the establishment or modification of an order for domestic support obligations;

(iii) concerning child custody or visitation;

(iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or

(v) regarding domestic violence;

(B) of the collection of a domestic support obligation from property that is not property of the estate;

(C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute;[8]

Section 362(b)(2) excludes from the automatic stay a lot of family law proceedings, but there is a trap in both §362(b)(2)(A)(iv) and (b)(2)(B). Both of those sections reference “property of the estate.” Property of the estate is defined by 11 U.S.C. §541, which is neither a short nor a simple statute. However, in a nutshell, property of the estate is summed up in §541(a)(1):

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.[9]

Section 541 limits the family law court’s ability to divide property of the estate, but it also limits the ability to collect a “domestic support obligation”[10] from property of the estate. The real trap here is that if the debtor filed for Chapter 13 bankruptcy, property of the estate is expanded to include property acquired post-petition, including post-petition wages; that means that collecting a “domestic support obligation,” which generally means child support or alimony that accrued prior to the time the bankruptcy was filed, is going to be stayed for the length of the debtor’s three- to five-year Chapter 13 plan of reorganization unless the stay is lifted or modified by the bankruptcy court. A far better plan is to file a proof of claim in the debtor’s Chapter 13 case because then the past-due support will have to be paid in full during the plan.

Before deciding how best to proceed with litigation or collection efforts involving property that may be property of the estate, read all of the statutes cited above carefully, paying particular attention to which chapter of bankruptcy the debtor has filed. Then, consult a bankruptcy attorney before proceeding further. Neither Section 541 nor the definition of “domestic support obligation” was quoted here in full. They are lengthy and complicated statutes. Also, if the best decision is to ask the bankruptcy court to lift or modify the stay to allow the stayed proceeding to continue or to ask the court to abandon a specific asset from the estate, you will want to consult with experienced bankruptcy counsel.

CONCLUSION

Violating the automatic stay can have serious and expensive consequences. In the appropriate case, remedies include actual damages, punitive damages if appropriate, attorney fees and costs. Section 362(k)(1) allows an individual injured by a willful stay violation to recover damages if a preponderance of the evidence establishes that the offending party knew about the bankruptcy filing and intended the actions that violated the stay. Specific intent is not required.[11]

Clearly, the automatic stay goes into effect when a bankruptcy is filed, but when does it end? The stay terminates at the earliest of the following events: the time the case is closed, the time the case is dismissed or when a discharge is granted or denied.[12] Never be afraid to contact a bankruptcy lawyer to walk you through this. We understand our boggling most of the Bankruptcy Code is to lawyers who don’t work with it regularly, and most of us are happy to take calls from other practitioners. In many cases, you are our best source of business!

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ABOUT THE AUTHOR

Elaine M. Dowling is a solo practitioner in northwest Oklahoma City. She represents people with debt or debt-related issues, doing various types of work for all kinds of people with credit report problems or identity theft issues – filing bankruptcies, helping people with credit reports, defending collection cases, defending foreclosure cases and otherwise trying to make a difference for people who have been handed more by life than they can handle.

 

 

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ENDNOTES

[1] 11 U.S.C. §362(a).

[2] 11 U.S.C. §101(15).

[3] See, Kline v. Deutsche Bank Nat’l Trust Co. (In re: Kline), 472 B.R. 98 (B.A.P. 10th Cir. 2012). In Kline, a creditor, without notice of the bankruptcy filing, served a foreclosure petition on the debtor eight days after the bankruptcy was filed. The court found that any action taken in violation of the automatic stay is void, even if there is no actual notice of the bankruptcy filing. Kline, 472 B.R. at 103.

[4] 11 U.S.C. §101(5).

[5] See, Oklahoma Federated Gold & Numismatics, Inc. v. Blodgett, 24 F.3d 136, 141-142 (10th Cir. 1994).

[6] 11 U.S.C. §1301.

[7] Oklahoma Federated Gold & Numismatics, Inc. v. Blodgett, 24 F.3d 136, 141-142 (10th Cir. 1994); citing, A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir.), cert. denied, 479.

[8] 11 U.S.C. §362(b).

[9] 11 U.S.C. §541(a)(1).

[10] Domestic Support Obligation is defined at 11 U.S.C. §101(14A).

[11] In re: Calloway, Case No. 15-13970-JDL (Bankr. W.D. Okla. Feb. 19, 2016), citing, In re: Johnson, 501 F.3d 1163 (10th Cir. 2007); In re: Kline, 472 B.R. 98, aff’d 514 Fed. Appx. 810 (10th Cir. 2013).

[12] See, In re: Calloway, Case No. 15-13970-JDL (Bankr. W.D. Okla. Feb. 19, 2016).