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Creditors obligated to pause collection attempt during bankruptcy

On Behalf of | Mar 4, 2020 | Chapter 7 Bankruptcy

One reason why people in North Carolina may file for personal bankruptcy is to put an end to creditor calls and collection attempts, including lawsuits and repossessions. People struggling with insurmountable debt may face intensive attempts to collect, and filing for bankruptcy may provide them with options to find relief. When people file a bankruptcy petition, an automatic stay goes into effect. Creditors that want to move forward with ending a lease or other actions need to approach the bankruptcy court first, and they can be penalized for failing to comply with the automatic stay.

However, one issue that has remained in dispute is whether creditors in a bankruptcy case also need to act affirmatively to put an end to collection processes that are already in place. Some courts have decided that creditors do not have this obligation, but others have held that they do, leaving some uncertainty in place. In one case, a woman had a debt for unpaid legal bills to her former divorce attorney, who had previously obtained a judgment against her and sought wage garnishment against her for the amount in question. The debt was included as part of the bankruptcy petition in addition to the $1,000 in wages that had already been garnished.

When her bankruptcy attorney contacted the former lawyer, now her creditor, and asked him to stop the garnishment action, he refused, saying that it was not his obligation. The bankruptcy court disagreed, however, holding him in contempt and ordering him to pay legal fees for the other party.

Because bankruptcy courts have decided this matter differently, the Supreme Court may rule on this issue in the coming term. In either case, bankruptcy may provide significant protection from creditor action. A bankruptcy attorney may advise about how the process might lead to debt relief.


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