Should I Tell Creditors I’m Filing Bankruptcy?
Facing bankruptcy? Understand the complexities of communicating with creditors and manage interactions confidently and strategically.
Considering bankruptcy often raises questions about communicating with creditors. Understanding the procedures and effects of bankruptcy on creditor interactions can provide clarity during this process.
Timing of Communication with Creditors
Deciding when to inform creditors about a bankruptcy filing involves strategic considerations. No legal requirement exists to notify creditors before actually filing. Doing so can sometimes lead to unintended consequences, potentially causing more stress. Creditors, upon learning of a debtor’s intent to file, might accelerate their collection efforts, including wage garnishments, lawsuits, or repossessions, before bankruptcy protection takes effect.
Once a bankruptcy petition is officially filed, creditors are formally notified. The bankruptcy court typically sends official notices (Form 309A) to all creditors listed in the paperwork. This notification usually occurs within a few days to two weeks after filing. It informs creditors of the bankruptcy case and its protections.
Content of Communication and What to Avoid
When communicating with creditors, particularly after a bankruptcy filing, the message should be precise and factual. If a creditor contacts you after your case has been filed, politely inform them you have filed for bankruptcy protection. Provide your bankruptcy case number and filing date. If represented by an attorney, direct the creditor to communicate with them.
Understanding what information to avoid sharing is equally important. Debtors should refrain from making new promises to pay or entering new debt agreements once bankruptcy is considered or filed. Accumulating new debt, especially for non-essential items or cash advances, within 70 to 90 days before filing can raise fraud concerns and may prevent that debt from being discharged. Selectively paying certain creditors, such as friends or family, within 90 days to a year before filing could be deemed preferential transfers, which a bankruptcy trustee might seek to recover and redistribute among all creditors.
Creditor Actions and the Automatic Stay
The moment a bankruptcy petition is filed, the “automatic stay” goes into effect. This provision, outlined in Section 362, immediately halts most collection actions against the debtor. The automatic stay provides immediate relief and time for the debtor to reorganize without creditor harassment. It applies across all chapters of bankruptcy, including Chapter 7 and Chapter 13.
The automatic stay prevents creditors from taking many actions, including:
- Initiating or continuing lawsuits
- Wage garnishments
- Repossessions of property
- Foreclosure proceedings
- Making collection phone calls or sending letters
- Taking any steps to collect on pre-petition debts
- Shutting off utility services for at least 20 days
While broad, the automatic stay has specific exceptions. It does not stop actions related to child support or alimony payments, certain tax debts, or criminal proceedings. Creditors can also petition the court to “lift” the automatic stay under specific circumstances, such as if their collateral is losing significant value or if the debtor lacks equity in a property not necessary for reorganization. If a creditor knowingly violates the automatic stay, they can face serious penalties from the bankruptcy court, including fines, actual damages, attorney’s fees, and punitive damages for willful violations.
Managing Creditor Contact
Even with the automatic stay, contact from creditors is possible shortly after filing. This often occurs because it can take a few days to two weeks for the court’s official notice to reach all creditors and for their systems to update.
If a creditor contacts you during this interim period, politely inform them you have filed for bankruptcy, providing your case number and filing date. This direct communication can often resolve the issue, as most creditors will cease contact once aware of the bankruptcy.
If a creditor continues contact after being informed and receiving official court notice, their actions may violate the automatic stay. In such instances, keep a detailed record of all communications, including date, time, caller’s name, and what was discussed. This documentation is valuable evidence.
If contact persists, notify your bankruptcy attorney immediately. Your attorney can then take action, such as filing a motion for sanctions against the creditor for violating the federal court order. The court has authority to compel the creditor to stop and may award damages to the debtor for the violation.