Attempting Debt Collection Efforts After a Debtor Files for Bankruptcy

Are you or your collection attorney attempting debt collection efforts even though the debtor filed for bankruptcy? If so your collection attorney is exposing you, the law firm, and themselves to personal liability for a money judgment that could far exceed your claim.

Enforcing a claim and/or a judgment against an entity or individual who has an active bankruptcy pending or who has received an order discharging them from liability is more than a bad idea. Not only is it in bad faith–violating the automatic stay of the Bankruptcy Court–it also comes with a financial penalty. By violating the automatic stay, you may be liable for not only the amount you collected but the attorneys’ fees and costs of the bankruptcy trustee and punitive damages. You can still be held responsible even if you did not know the specific acts undertaken by your collection attorney.

A Cautionary Tale

We represented a debt collection claim in 2016 to recover monies for goods sold and delivered, specifically leather goods sold to a retail shop in New York. The debtor did not pay. Because of the amount involved, a debt collection suit was recommended, and ultimately a judgment was entered. We executed on the judgment and before any monies could be restrained to satisfy the client’s judgment, the debtor filed for bankruptcy; a no-asset case. We notified the client and closed our file.

In 2021, an attorney contacted our client to inquire as to whether they wished to execute on their unsatisfactory judgment. The attorney had located unclaimed funds and was willing to execute on the judgment. Assuming it was fine to proceed, the client gave the attorney the go-ahead, engaging them to continue previously stayed efforts against the bankrupt delinquent customer.

The attorney was able to restrain and collect the unclaimed funds on the client’s behalf. Now the client finds themselves, the lawyer, and the law firm that collected the unclaimed funds named in an adversarial proceeding requiring them to not only return the gross amount collected by the law firm (even though the client received a lesser sum net of attorney fees) but also the time and expenses of the trustee.

It seems that either the debt collection attorney did not check to see if the debtor was still in bankruptcy. If they had, they disregarded any finding and went ahead full steam, willfully ignoring the bankruptcy. Now the client is left holding the bag and is unable to locate the attorney and/or the firm.

Violating an Automatic Stay

A creditor who willfully violates an automatic stay exposes themselves to damages and punitive damage. Punitive damages are defined as:

Punitive damages are considered punishment and are typically awarded at the court’s discretion when the defendant’s behavior is found to be especially harmful.

The automatic stay, which arises upon the filing of a bankruptcy petition, is one of the most important features of the Bankruptcy Code. A willful violation is not tolerated.

Thankfully, in this case, we contacted the trustee and were able to work out a deal on the client’s behalf to pay the amount collected by the rogue collection attorney and a little bit more.

Do your research before selecting a debt collection attorney. Make sure when engaging collection counsel, whether it be for demand, mediation, arbitration, foreclosure of mechanics lien, or judgment recovery, they do the right thing. If not, your attorney’s actions can cost you way more than the uncollectible account. If you have a debt collection matter you need assistance with, contact Frank, Frank, Goldstein and Nager.

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