Bankruptcy Creditors Should Be Weary of Continuing to Deduct Monies Via Automatic Deduction in Bankruptcy

Posted by on Aug 25, 2011 in Automatic Stay - Bankruptcy Code Section 362, Chapter 7 Bankruptcy Issues | 0 comments

Bankruptcy clients sometimes file for relief under chapter 7, 11, or 13 forgetting that an automatic deduction with the bank or some other creditor was authorized and set up long before the bankruptcy was ever filed.   Typically, creditors are weary of continuing auto-deductions once a case is filed and respect the concept of the automatic stay.  However, that is not always the case.

In cases where debtors have had money taken out via non-authorized automatic deductions post-petition, the debtor can pursue the return of those moneys.  In fact, JCH Law Firm has experience in handling such matters and enforcing the automatic stay against creditors.  The case of In re O’Neal, 165 B.R. 859 (Bankr. M.D. Tenn. 1994) may provide guidance on the issue.

In O’Neal, Chief Bankruptcy Judge Paine held that a creditor who received an automatic loan payment of $116.00 from debtor’s bank after the creditor had been notified of the bankruptcy filing, was an act to collect a claim against debtor in violation of the automatic stay.  Debtor was not only entitled to a refund, but also compensatory damages, attorney fees, and costs.

This case has been cited at least once by the Eastern District.  However, this case may also have persuasive effect with a court of another district as well, and thus creditors are wise to review the O’Neal case before collecting post-petition automatic deductions that were set up long before the bankruptcy filing.

Creditors have the burden and responsibility to ensure no postpetition automatic loan payments are withdrawn from debtor’s checking account, absent debtor’s clear postpetition consent to do so and creditor must do whatever action is necessary to achieve such goal.  Failure to do so can lead to sanctions for violation of automatic stay in form of debtor’s damages, including attorney’s fees and costs.  11 USC Section 362(a)(3-6), (k).  However, all this can be avoided if debtors ensure that all unwanted automatic deductions are canceled appropriately and as early as possible.

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