Inaction may still cause trouble in bankruptcy

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

One of the long-standing rules of bankruptcy law is that the automatic stay prevents creditors from taking steps to enforce the debts owed to them. In other words, they must do nothing once the debtor files for bankruptcy. However, doing nothing can also get a creditor in trouble in Tennessee if they have already begun a collection action before the bankruptcy was filed and they take no steps to halt the collection action.

A lawyer representing a client who later went bankrupt was found to have violated the automatic stay when he started a wage garnishment before bankruptcy and then did not take steps to halt the garnishment when the debtor filed a Chapter 7 bankruptcy. The lawyer was found in contempt of the bankruptcy court when he refused a request to stop taking the debtor’s wages. The court held that the wages were the property of the bankruptcy estate and the lawyer could do nothing to take possession of them. Here, the lawyer did not take an affirmative step to seize the property. He merely refused to stop something already underway so he was guilty of inaction.

This is an issue where courts have divided. When there is a split among courts, the Supreme Court may step in, and the high court is expected to wade into this issue.

Creditors and debtors in a bankruptcy proceeding need legal advice to help them stay on the right side of the court. A bankruptcy attorney may be able to help debtors and creditors alike in making sure that their rights are protected in a manner that follows the rules of the court. A bankruptcy court has very strict rules and there are penalties for breaking them. Thus, legal advice in a bankruptcy proceeding may make the difference between a successful bankruptcy filing and one that is doomed to failure.


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