One of the advantages of filing for bankruptcy is that it triggers something called an “automatic stay.” The stay takes effect immediately, and prohibits creditors from engaging in most debt-collection activities, such as demanding loan payments by phone or mail. The purpose of the stay is to ensure that the bankruptcy process can distribute a debtor’s assets to creditors in an orderly fashion, and to ensure that one creditor cannot take advantage of another by racing to capture scarce assets.
The basic concept of the automatic stay is well-settled in bankruptcy law. But the precise scope of the stay is a matter of some dispute, and bankruptcy courts have issued numerous opinions attempting to clarify the types of creditor activities that the stay does and does not allow.
The Bankruptcy Appellate Panel for the Ninth Circuit (BAP) recently added to this body of case law in In re Zotow, 2010 Bankr. Lexis 2178 (9th Cir. BAP 2010). The case involved a married couple whose assets included a home mortgage that required monthly payments of principal, interest, and approximately $185 in escrow items such as taxes and homeowners’ insurance. The couple fell behind on their payments and eventually filed for bankruptcy under Chapter 13. After receiving notice of the bankruptcy, the mortgage lender calculated a new escrow payment of approximately $300 per month. The lender then notified the couple in writing to explain the higher amount and its effect on the total monthly mortgage payment. The Chapter 13 trustee later made post-petition installment payments to the lender based on the new escrow amount.
The couple argued that the lender violated the automatic stay in two ways: (1) by increasing the required amount of the post-petition escrow deposits as a ruse to collect pre-bankruptcy escrow arrears, and then sending notice of this increase; and (2) by receiving the increased post-petition mortgage payments from the Chapter 13 trustee.
Before addressing these arguments, the court explained that a creditor communication generally violates an automatic stay where direct or circumstantial evidence shows that the communication was geared toward collection of a pre-bankruptcy debt, was accompanied by coercion or harassment, or otherwise put pressure on the debtor to pay. On the other hand, “mere requests for payment,” or statements providing information about a debt where the debtor has an interest in receiving the information to formulate a confirmable Chapter 13 plan, are generally permissible.
Applying these guidelines, the court rejected both of the couple’s arguments and held that the lender did not violate the automatic stay. The lender’s notice was permissible because it was not an invoice, merely set forth the facts of the debt, and was not accompanied by a payment coupon or envelope. The couple, moreover, had an interest in receiving the information in the notice to formulate an appropriate Chapter 13 plan, and neglected to challenge the higher escrow amount soon after receiving the notice.
The lender’s act of receiving the higher escrow payments was also acceptable under the stay because it did not involve any act to collect a pre-bankruptcy debt. Indeed, the lender did not act at all; the Chapter 13 trustee simply made the payments as required under a local rule for post-petition contract installment payments.
In re Zotow involves a fairly technical issue, but is an important case nevertheless. If you are contemplating bankruptcy, you should know your rights, and what creditors can and cannot do during the bankruptcy process. An experienced bankruptcy attorney can help you understand the types of relief you can expect from an automatic stay and take action to enforce the stay where necessary.
This is a guest post written by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy attorneys who provide debt relief and consumer bankruptcy counsel.
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