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Supreme Court to decide on automatic stay issue

New Jersey creditors in a bankruptcy case may be required not just to cease any actions against the debtor once the filing is made but also to take affirmative steps to put a stop to any action that is already in progress. This was the ruling of a Virginia bankruptcy court, but the United States Supreme Court will make a decision on the question later in the year.

In this case, a woman was in debt to the attorney who represented her in her divorce. When she did not pay, the attorney got a wage garnishment order against her for $10,000. A hearing was scheduled regarding $1,000 that was being held by the state court as part of this garnishment. The woman then filed for Chapter 7 bankruptcy. The $1,000 was on her list of exempt assets.

The attorney was asked to stop the garnishment, but he maintained that he was not required to take an affirmative action in order to stop any kind of proceedings against a debtor. The court disagreed, finding that his inaction was in violation of the automatic stay. Once the Supreme Court rules, there should be more clarity about whether a creditor is obligated to simply cease pursuing a debtor or take steps to stop a process that is already in motion.

With a Chapter 7 bankruptcy, a person is generally able to discharge most debts except for those that are usually not eligible for a discharge in bankruptcy, such as student loans, judgments and taxes. Creditors are required to stop trying to collect from individuals who have filed for bankruptcy. This means they can no longer contact the person about debts and that other actions, such as foreclosures, must stop as well. A bankruptcy filing might give a person a fresh financial start.

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