Some debtors in Connecticut may decide to file for bankruptcy after facing collection calls, lawsuit threats and other actions taken by creditors to. When a bankruptcy petition is issued, an automatic stay that halts all efforts to collect existing debts is initiated. Creditors that want to pursue a lawsuit, repossess a car or other property, or set off debts need to go to the court for permission. In general, the bankruptcy court becomes the venue to address debts, and filers may find relief from the constant onslaught of creditor actions.
One issue that’s not always clear is what creditors are obligated to do to stop collection activities that were already in place before the Chapter 7 filing. Some courts have held that when creditors do nothing, it does not violate the stay; they must take some action to do so. On the other hand, others have held that a creditor could run afoul of the stay by failing to act. In one case, a woman owed unpaid legal bills to her past divorce attorney before filing for bankruptcy. The creditor had already received a judgment against her and filed for wage garnishment, and $1,000 was collected.
She listed the debt and garnishment on her bankruptcy filing, and her bankruptcy lawyer contacted the creditor to ask him to halt the garnishment activity. He refused to do so, saying he had no obligation to take action to stop an existing process. The bankruptcy court sided with the debtor, however, and held the creditor in contempt for a willful stay violation.
The U.S. Supreme Court is expected to rule on the issue in its coming term. No matter how it’s decided, an attorney may help a client achieve strong protections from creditor action by filing for personal bankruptcy.