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O'Bryan Blog


Automatic stay in bankruptcy and creditor obligations

When Kentucky consumers file for bankruptcy, their creditors must cease all action against them. This is known as an “automatic stay”. In order to continue pursuing action, such as a lawsuit or a repossession, the creditor has to get the bankruptcy court’s permission.

In general, this involves the creditor actually taking an action, but according to at least one Virginia court, a creditor’s failure to take action could also constitute a violation of the automatic stay. In that case, a woman filed for Chapter 7 bankruptcy before paying all that she owed to the attorney who represented her in her divorce. The attorney had put a wage garnishment in motion, and when the woman filed for bankruptcy, a court hearing had been scheduled regarding $1,000 that had been withheld from her wages. The $10,000 she owed the attorney was listed as a debt, and the $1,000 was listed as an exemption.

The attorney was notified by the woman’s counsel and asked to stop the garnishment. He said he was not obligated to take an affirmative action. The bankruptcy court ruled that he should be held in contempt for willful violation of the bankruptcy stay. However, the U.S. Supreme Court will make a definitive ruling this summer on whether inaction can also be a violation of the automatic stay.

People who are struggling with debt may want to contact an attorney about their options and to find out whether they qualify for a Chapter 7 or a Chapter 13 bankruptcy. While there are a few debts that cannot be discharged in bankruptcy, it can still help people get a new start financially. An attorney may also be able to help with completing paperwork and filing the necessary documentation.

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