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Court looks at creditor obligations for automatic stays

On Behalf of | Feb 28, 2020 | Chapter 7 Bankruptcy |

A Virginia bankruptcy court has ruled that if a creditor does not act to stop a collection activity prior to a person’s filing for bankruptcy, this could be considered a violation of the automatic stay. However, the United States Supreme Court will rule on this issue later in the year.

In the Virginia case, an attorney had represented a woman in her divorce, and the woman did not pay the attorney the full amount owed. The attorney was able to get a wage garnishment against the woman. A hearing was schedule regarding $1,000 in wage deductions that was being held by the state court, but in the meantime, the woman filed for Chapter 7 bankruptcy. In the bankruptcy petition, the $1,000 was listed as an exemption. The attorney was told by the woman’s counsel to stop the garnishment, but the attorney said he was not obligated to perform an action to stop the process.

The bankruptcy court found the attorney in willful violation of the automatic stay. The attorney had not asserted either a lien or an ownership interest in the $1,000, which worked against him. According to the court, not putting a stop to the garnishment meant that the attorney was improperly controlling the woman’s property.

Unlike a Chapter 13 bankruptcy, which involves paying back some debts, most debts are discharged in a Chapter 7 bankruptcy. There are a few types of debts that usually cannot be discharged in a bankruptcy, including tax debt, most student loan debts and child support debts. However, credit card debt, medical debt and many other types of debt can be, and this can allow for a fresh financial start. Even if all debts are not dischargeable, people may be able to budget to pay off remaining debts after the bankruptcy is finalized.