understanding bankruptcy

Bankruptcy’s Automatic Stay Isn’t Absolute

August 25th, 2014 by Peter Brackney

understanding bankruptcy

The automatic stay of bankruptcy, found in section 362 of the bankruptcy code, stops creditors from taking certain actions against debtors who have filed for bankruptcy. The automatic stay can stop a foreclosure sale and it can stop harassing phone calls from creditors.

For the vast majority of debtors, the automatic stay will stop all collection activities. Or at least it is supposed to. But the automatic stay isn’t absolute. Some creditors can continue their collection activities even though a bankruptcy has been filed.

The Sixth Circuit recently considered such a situation.

In Robinson v. United States (Case No. 13-5857, decided 22 Aug. 2014), the Sixth Circuit found that the automatic stay did not prevent the government from enforcing its judgment against the bankruptcy debtor.

The debtor, Mr. Johnson, pled guilty to various criminal acts over the years and faced criminal restitution claims of nearly $400,000. When he filed for bankruptcy under chapter 13, he had paid only $8,000 of the sums due. Under 18 U.S.C. 3613(a), the government may enforce criminal restitution judgments “notwithstanding any other Federal law.”

Although the bankruptcy court found that the government couldn’t avoid seeking relief from the automatic stay, the district and circuit courts disagreed. The Sixth Circuit found that section 3613 superceded the bankruptcy code and the automatic stay doesn’t protect a bankrupt debtor from the government’s collection of criminal restitution.

The automatic stay provisions are quite extensive and there are many other instances in which legal actions may proceed without regard to whether a debtor has filed for bankruptcy.

Too, relief can be granted from the automatic stay after a creditor filed a motion requesting such relief. This is often the case with vehicles and homes which the debtor does not want or is unable to retain after the bankruptcy.

Understanding how the automatic stay works is critical to protecting debtors who file for bankruptcy.