Inaction may be action for a bankruptcy court

by | Mar 18, 2020 | Bankruptcy

In a Texas bankruptcy, the ordinary rule is that the automatic stay requires creditors to freeze in place and do nothing once the bankruptcy is filed. However, creditors should be aware that there are some situations where doing nothing can actually get them in trouble with the court.

Specifically, the trouble for creditors can come when they have already begun a collection action before the bankruptcy was filed. Some courts have recently held that the creditors have an obligation to take an affirmative obligation to stop that collection action once the automatic stay is in place. If they are passive and do not cancel the collection, they can be found in contempt of court and may lose the right to collect.

In this particular case, a lawyer had initiated a collections action against a client for an unpaid legal bill. This resulted in a garnishment of the client’s paycheck. The client later declared bankruptcy. The client’s bankruptcy lawyer demanded that the creditor halt the garnishment that was already in place. The creditor did nothing and the garnishment remained in place. Even though the creditor did not undertake a new action, the failure to call off the existing action was enough for the bankruptcy court to find him in contempt.

Bankruptcy presents many different legal issues and there are definite penalties for failure to follow the rules. Those who are debtors must make certain to stick to the process carefully in order to successfully emerge from bankruptcy. Creditors must also strictly observe rules or face penalties like the creditor above. A bankruptcy lawyer may be able to help both debtors and creditors alike get through the process and advise them of the special rules of the process. A failure to know and understand the rules will not be a valid excuse for a bankruptcy court.