Collections Blog Post 8 - What Happens When a Judgment Debtor Declares Bankruptcy?

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Sometimes, debtors declare bankruptcy, causing further collections hurdles.  The Law Offices of Peter D. Isakoff knows how to navigate debtor bankruptcies to get you paid after your Court win.

1. Impact of Automatic Stay

Upon a Judgment Debtor’s filing of bankruptcy, an “Automatic Stay” automatically springs into effect.  An “Automatic Stay” is a Bankruptcy Court Order stopping all debt collection attempts once a party declares bankruptcy. The Automatic Stay generally prohibits a Judgment Creditor’s exercise of their contractual and statutory remedies against the Judgment Debtor.  See 11 U.S.C. § 362.  In general, collection attempts, the filing or continuation of lawsuits against the Judgment Debtor, the enforcement of any judgments against the Judgment Debtor, and acts to create, perfect or enforce liens against property of the estate are stayed.  Thus, the Stay typically applies to all of a Judgment Creditor’s collection remedies.

Although there are exceptions to the Automatic Stay, and you can seek relief from the Stay, most Judgment Debtor bankruptcies require strict adherence to the protections afforded by the Automatic Stay.  In fact, such Stay protections are generally interpreted broadly, making even informal collection attempts a potential Stay violation.  See, e.g., In re Mimi's of Atlanta, Inc., 5 B.R. 623, 627 (Bankr. N.D. Ga. 1980).  For example, phoning the Judgment Debtor for collection or sending a collection letter will likely violate the stay.  Consequently, Judgment Creditors should proceed with caution upon a Judgment Debtor’s filing for bankruptcy relief.

In contrast, actions brought by the debtor against others are not stayed when a debtor files for bankruptcy.  Thus, lawsuits or counterclaims brought by the Judgment Debtor are not stayed, even though actions in the same proceeding against the debtor will be stayed.

2.               Relief from Automatic Stay 

            If you’re a Judgment Creditor, you can petition the Bankruptcy Court to obtain relief from the Automatic Stay with respect to a particular debt, so that you can enforce your right to take certain collection actions.  See 11 U.S.C. 362(d).  Such party may only take actions that would ordinarily be a violation of the Automatic Stay once the Bankruptcy Court has entered an order granting relief from the Automatic Stay after the filing of a motion by the Judgment Creditor seeking such relief. 

The Bankruptcy Court will grant relief from the stay “for cause,” including the lack of adequate protection of an interest in property of such party seeking relief.  11 U.S.C. 362(d)(1).  The term “cause” is not defined in the Bankruptcy Code and is determined on a case-by-case basis.  In determining if the Automatic Stay should be lifted for cause, courts generally “must balance potential prejudice to the bankruptcy debtor’s estate against the hardships that will be incurred by the person seeking relief from the Automatic Stay if relief is denied.”  In re Smith, 333 B.R. 94, 101 (Bankr. M.D.N.C. 2005).  Factors to consider in determining whether the Automatic Stay should be modified for cause include: (1) whether relief interferes with the bankruptcy; (2) the good or bad faith of the debtor in filing the bankruptcy, (3) injury to the debtor and other creditors if the stay is modified; (4) injury to the movant if the stay is not modified; and (5) the relative portionality of the harms from modifying or continuing the stay.  See, e.g., Scripps GSB I, LLC v. A Partners, LLC (In re A Partners, LLC), 344 B.R. 114, 127 (Bankr. E.D. Cal. 2006).

3.               Conclusion

            The Collections process can be complicated and confusing, especially when navigating debtor’s rights and debtor bankruptcies.  By knowing the procedural rules and by planning for the potential for bankruptcy when negotiating with delinquent Judgment Debtors, Judgment Creditors can minimize the risk of loss and better position a Judgment Creditor to deal with their Judgment Debtor’s bankruptcy.  If you need thorough and aggressive legal representation getting paid what you’re owed, please contact The Law Offices of Peter Isakoff anytime, day or night, at (336) 863-8348 (Main) or (336) 864-9115 (Español).

DISCLAIMER: The information in this article is provided for informational purposes only. It is not offered as and does not constitute legal advice. The accuracy of the information may change pending changes in applicable law. If you have questions about a specific matter, you should contact a lawyer. The use of this article or any information provided in it does not establish any lawyer/client relationship.