What are the consequence of violation of the stay?

As we stated before in our earlier posts, the filing of a petition under any chapter of the Bankruptcy Code triggers an automatic stay which stays almost all efforts by creditors to enforce their claims against the debtor or the debtor’s property. This automatic stay is universal in nature and it is automatic as nothing else needs to invoke the injunction. A petition is deemed filed when placed in the custody of the clerk of the court. The automatic stay freezes the rights of the debtor’s creditors as of the date of the petition to ensure that the claims against the debtor’s estate are resolved in an orderly fashion and in accordance with the Bankruptcy Code.

In this post we discuss what would happen if someone violates the stay.

1. Most courts find all actions violating the stay as void.

2. Acts taken in violation of the bankruptcy code would be set aside.

3. The creditors would be returned to its status at the time the petition was filed. (de novo ante)

4. The bankruptcy court may file contempt proceedings against the creditor violating the bankruptcy orders.

5. A willful violation of the stay does not require specific intent to violate the stay.

6. A failure of innocent violation after receipt of notice of the bankruptcy may be willful violation of the automatic stay.

7. A notice provision in Section 342(g) is added after the BAPCPA which states a monetary penalty may not be imposed for a stay violation unless the conduct that is the basis of the stay violation occurred after the creditor received effective notice under Section 342.

8. Any individual debtor injured by a willful violation of the stay may be awarded actual damages resulting from the violation, including costs and attorneys’ fees.

9. The standard for imposition of damages under Section 362(k) is whether the defendant knew the automatic stay and whether his action were intentional.

10. If the violation is egregious, the debtor may be awarded punitive damages.

11. Treble damages, if allowed by state, may be granted.

12. A proceeding seeking damages for violation of the stay under Section 362(k) is “core proceeding”.

13. Debtors have an obligation to mitigate their damages.


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