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Bankruptcy may provide protection from collection agencies

On Behalf of | Mar 5, 2020 | Chapter 7 Bankruptcy |

Many Virginians struggling with overwhelming debt face creditor calls, collection letters and threats of lawsuits. This situation may encourage people to file for personal bankruptcy. After all, filing for Chapter 7 puts an automatic halt to any efforts to collect the debt outside the bankruptcy process. It can provide some relief from ongoing calls, creditor harassment or the potential of a judgment in court. If creditors want to continue with a debt collection attempt, including ending a lease, repossessing property or offsetting debts, they must first go through the bankruptcy court.

However, it may be less clear whether creditors have to actively stop actions they have already taken after a bankruptcy filing. While one Virginia court has affirmed that this is the case, other courts have ruled against the principle in the past. Now, the matter is expected to reach the U.S. Supreme Court. In the case in question, $1,000 of a woman’s wages had been garnished by the state as part of an effort to collect on a $10,000 debt for legal bills from a divorce. After being approached by the woman’s bankruptcy lawyer, the woman’s creditor refused to take action to terminate the garnishment, saying he had no obligation to do so.

The woman’s bankruptcy lawyer asked the bankruptcy court to hold the creditor in contempt for violating the stay on collections, and the court agreed. The court also held that the creditor was inappropriately attempting to control the debtor’s property, which instead properly belonged in the bankruptcy estate.

While the Supreme Court is expected to take up this issue in the future, the case highlights the importance of the bankruptcy process in potentially protecting people from collections. A bankruptcy attorney may help a client seek debt relief and move toward a different financial future.

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