Question

examine rights of creditors and/or debtors and judge them from an ethical perspective.

Answer 1

Answer

Debtors Rights:

When a debtor files for bankruptcy, he or she is immediately afforded the powerful protections of an injunction referred to as the automatic stay. As soon as the debtor files an initial petition for bankruptcy, his or her creditors become obligated to respect the stay’s boundaries and limitations. In addition to the automatic stay, debtors are further protected under the Fair Debt Collection Practices Act (FDCPA).

The provisions of the FDCPA are always in effect. But when a debtor files for bankruptcy, he or she gains additional, bankruptcy-specific protections under the automatic stay. In accordance with the stay, wage garnishment must end, and collection actions cannot be initiated. For example, if the automatic stay is already in effect, a creditor cannot then initiate foreclosure proceedings on a debtor’s home. Similarly, if a utility company was planning on disconnecting a service due to nonpayment, the stay will prevent the disconnection for a minimum of 20 days.

Creditor Rights:

Time and time again, consumer bankruptcy and the effects of the automatic stay pose a considerable challenge for creditors who are attempting to collect on a debt. While bankruptcy looks like a life preserver from a debtor’s perspective, to creditors it’s more like a barbed-wire fence. Nonetheless, creditors are armed with their own rights and options should a bankruptcy interfere with their collection attempts. Notably, creditors may be able to lift the stay altogether.

However, lifting a stay does take some effort on the creditor’s behalf. First, the creditor must file a motion with the appropriate court, at which point the debtor will be notified and granted the opportunity to attend a hearing. At the hearing, the burden of proof falls on the creditor, who must successfully demonstrate that there is sufficient reason to lift the stay.

Secured creditors typically have more success than unsecured creditors in doing so, though unsecured creditors may prevail in instances where the unsecured debt will not be discharged by the bankruptcy (e.g. child support debt, alimony debt). If a secured creditor can persuade the judge that the debtor is unlikely to continue paying off their debts, a lift on the stay may be granted.

It should also be noted that while the automatic stay prevents creditors from initiating collection actions (e.g. foreclosure, repossession), it cannot turn back the hands of time to invalidate actions which were begun prior to the stay. For example, if a creditor begins the foreclosure process before the debtor files for bankruptcy, the stay will put a temporary freeze on the foreclosure while it is in effect. However, the stay is neither lifelong nor permanent — and when it is removed, the stalled collection actions may proceed.