What Happens When a Creditor Is Sanctioned in a Bankruptcy Case?

By Heather Frances J.D.

Debtors typically file a bankruptcy case to get relief from creditors and overwhelming debt, and bankruptcy laws provide for an automatic stay that immediately halts all collection efforts by creditors. However, unscrupulous creditors sometimes ignore court orders, both during and after a bankruptcy case. When creditors violate the court’s instructions, the court may sanction them, often forcing them to pay fines as punishment.

Debtors typically file a bankruptcy case to get relief from creditors and overwhelming debt, and bankruptcy laws provide for an automatic stay that immediately halts all collection efforts by creditors. However, unscrupulous creditors sometimes ignore court orders, both during and after a bankruptcy case. When creditors violate the court’s instructions, the court may sanction them, often forcing them to pay fines as punishment.

Creditor Behavior

When a debtor files for bankruptcy, an automatic stay goes into effect, which orders creditors to stop all ongoing collection efforts and prohibits new collection attempts. Sometimes creditors ignore the stay, even after the debtor makes them aware of it. If the creditor’s collection efforts continue after the creditor is informed of the stay, bankruptcy courts can impose sanctions against that creditor. Similarly, creditors who file frivolous motions to delay the bankruptcy case or otherwise waste the court’s time could also face sanctions.

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After Discharge

One of the final steps in a bankruptcy case is the discharge, or elimination, of a debtor’s remaining debt. Many types of debt are eligible for discharge. Once a debtor receives a discharge, creditors are prohibited from attempting to collect a discharged debt. When creditors try to collect on debts that have been discharged, debtors can seek sanctions against those creditors since courts can still issue sanctions after the bankruptcy case is completed.

Seeking Sanctions

When a creditor violates a bankruptcy court order, the debtor can first make sure the creditor is aware of the order. Once the creditor knows about the order, the debtor can return to court to ask for sanctions if the creditor continues to ignore it. To request sanctions, the debtor can file a motion with the bankruptcy court that issued the order, explaining how the creditor violated the order and asking for the type of sanctions the debtor wants. For example, the debtor can specifically ask for monetary sanctions to fine the creditor for its misbehavior.

Types of Sanctions

Bankruptcy courts have several sanction options at its disposal for addressing creditor violations. For example, courts can hold a creditor in contempt of court, impose fines or order the creditor to pay punitive damages to the debtor, including money for emotional distress. In addition, courts can order creditors to pay the debtor’s legal costs and attorney fees incurred by seeking the sanction.

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What Does It Mean if a Bankruptcy Is Lifted?

References

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