Automatic Stay- a Strong Tool.

Posted by Kevin on May 23, 2011 under Bankruptcy Blog | Be the First to Comment

It is the law that a bankruptcy filing acts as an automatic stay of most collection efforts against the debtor.  But how broad is that protection?  In a recent case in the Eastern District of New York (In re: Ebadi), the stay went beyond property owned by the debtor.  The debtor was a shareholder of CBC Media Realty.  CBC owned a commercial building which it used as collateral for a loan.  The debtor personally guaranteed the loan.  CBC defaulted on the loan and the creditor obtained a foreclosure judgment.  The debtor was named as a defendant in the foreclosure case.  Just prior to the sale, the debtor filed a Chapter 13 and notified the foreclosing creditor of the filing.  The creditor went ahead with the sale anyway.

Ultimately, the court found that the creditor violated the automatic stay (even though CBC never filed bankruptcy and the debtor, personally, did not own the building ) on the grounds that the debtor was a guarantor of the note and was named as a party to the foreclosure.  The Court voided the foreclosure sale, and the creditor was liable for actual damages to the debtor.  That could be the lost income because the debtor’s company could not conduct business.

The Court questioned whether the debtor filed bankruptcy in good faith because it never filed its schedules or other paperwork.  For that reason, the Court did not exact punitive damages.  Nonetheless, the creditor still got smacked with actual damages and the debtor’s legal fees.  The Court sent a strong message to creditors and their attorneys; that is, do not take the automatic stay lightly.

If you are being harassed or sued by creditors, know well that the Bankruptcy Code can protect you and your assets.  But you have to file to get the benefit of the automatic stay.