What Are The Creditors Duties Once They Have Been Informed Of A Bankruptcy Filing?

31 May What Are The Creditors Duties Once They Have Been Informed Of A Bankruptcy Filing?

Once a creditor has been informed that a bankruptcy has been filed, and if they have taken any steps since the filing, they have several duties. Failure to perform one or more of these duties can lead to an award of damages and legal fees. Some of these duties include:

1) A duty to restore the status quo.
2) A duty to act.
3) A duty to return property.
4) A duty to stop income execution and return funds.
5) A duty to stop scheduled sales.
6) A duty to contact the Sheriff or Marshall.
7) A duty to stop collection efforts.
8) A duty of further inquiry.

This and the next few blog articles will discuss these duties in more detail.

1. Duty to restore status quo. Once a creditor has been informed of a violation of the stay, the creditor has an obligation to restore the status quo and undo their post-petition collection actions. This duty exists even if they commenced the collection efforts without knowledge of the filing. When notice of a bankruptcy filing is received, the burden is on the creditor to take appropriate action, including discontinuing any efforts to collect a claim, and taking affirmative action to undo any action which may have been taken without notice of the bankruptcy in violation of the automatic stay.

2. Duty to act. A creditor cannot just sit back and do nothing. Courts have held that no action is unacceptable. A Georgia bankruptcy court held that “no action is action to thwart the effectiveness of the automatic stay”. A Maryland bankruptcy court held that “creditor inaction can often be as disruptive to the debtor as affirmative collection efforts”. The automatic stay is self-operating and it is not the debtor’s duty to make sure that collection efforts cease. The Georgia court concluded that “Since it is the creditor who set the collection effort into motion, it is the creditor’s duty to stop its “downhill snowballing””.

3. Duty to return property. Upon learning of a bankruptcy filing, a creditor must immediately take whatever steps are necessary to insure that any property taken is promptly returned to the debtor. The 11th Circuit found that this duty to return property arises at the filing of the case and is not contingent on any further order of the court or demand by the debtor. A Texas bankruptcy court held that “Retention of repossessed collateral is itself a violation of the stay”. Courts in Wisconsin, Florida, Ohio, as well as the 9th and 1st Circuits have found this also…”refusal to return property is a willful violation”, a creditor “cannot condition the return of vehicle upon proof of insurance” and the “original repossession was not a violation but refusal to return was”.

Next: What Are The Creditors Duties Once They Have Been Informed Of A Bankruptcy Filing- Part 2.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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