As we have said, a debtor not paying their debt is an inevitable part of extending credit. When this occurs, there are multiple things you could do in order to recover some or all of the money owed. Unfortunately, some of the companies that you are pursuing for payment may file for some form of bankruptcy. This will effect your collection process in many ways, but one of the main things it institutes is an automatic stay. According to Title 11 of the U.S. Federal Bankruptcy Code, you are required to stop all collection efforts once your customer files for bankruptcy protection. Here are some things you should know about the automatic stay and how to possibly get around it.
What exactly is the Automatic Stay?
The Automatic Stay is one of the fundamental protections provided by the U.S. Bankruptcy Code. It was designed to give a debtor protection and breathing space from creditors while they go through the bankruptcy proceedings. It prohibits creditors from attempting to collect on money owed and stops all foreclosure actions while the debtor either attempts to restructure their debt or come up with a payment plan with creditors. The stay starts immediately after a voluntary or involuntary bankruptcy petition is filed. No other specific filing is required.
What does this mean for you?
The Automatic Stay is not something you should try to mess with. Even the act of sending a payment reminder once the Stay is in effect could hold you responsible for damages. Even if you are a secured creditor, you are afforded no special exemption from the Stay. You may, however, take action against other co-debtors, co guarantors, or insurers, as long as your customer did not file for Chapter 13 bankruptcy. If Chapter 13 Bankruptcy was filed, you will not be able to go after any co-debtors due to how the bankruptcy is structured.
Possible Exceptions to the Automatic Stay
If you, as a business, belive you should have a reprieve from the stay, you must file for a Motion for Relief with the courts. A secured creditor is allowed to seek relief from the Stay by filing this motion. These are typical in Chapter 11 fillings, as it typically takes an extended amount of time for Bankruptcy proceedings to play out. You need to file as soon as possible though, as a preliminary hearing must commence within the first 30 days after filling and a final ruling but come out 30 days after that. Typically, Motions for Relief are granted in time sensitive matters.
Penalties for Violating
Any violation of the Automatic Stay is punishable as a contempt of court. This typically means you will end up paying any damages or attorney fees incurred by the debtor due to the violating. This can happen whether you knowingly or unknowingly violated the Stay.
As always, if you have specific legal questions we recommend contacting a lawyer clarify any situation specific to yourself.