Loan Servicing

Understanding the Risks of Violating Stay

Lance Wickham

Lance photo

Lance Wickham

Apr 04 20235 minute read

Bankruptcy filings can be a complex and challenging aspect of debt collection. One of the most critical aspects of bankruptcy law is the automatic stay provision, which prohibits creditors from taking collection actions against debtors who have filed for bankruptcy protection. Violating the stay increases several risks, including lawsuits, wasted staff time, uncollected funds, and an overly complicated bankruptcy processing system. This article explores these risks and emphasizes the importance of staying compliant with the automatic stay provision.

1. Risk of Lawsuit

Violating the automatic stay is illegal and exposes creditors to potential legal action from bankruptcy attorneys. Debtors or their attorneys may sue creditors for damages, including actual damages, punitive damages, and attorney fees. These lawsuits can be costly, time-consuming, and damaging to a creditor's reputation. Many Courts will allow attorneys to sue creditors after the 2nd or 3rd stay violation letter, but it is essential to maintain compliance with bankruptcy laws and avoid violating the automatic stay to minimize the risk of legal action.

2. Wasted Staff Time

Relying on attorney stay violation letters can be an inefficient and resource-intensive process. Staff members may spend anywhere from 23 minutes to 1 hour and 33 minutes processing and reviewing each notification, which significantly reduces productivity. Implementing a streamlined and efficient system for managing bankruptcy notifications helps minimize staff time spent on stay violation issues and frees up resources for other essential tasks.

3. Over Complicated Bankruptcy System

Struggling with bankruptcy notifications is often a symptom of an overly complicated and inefficient bankruptcy system. Navigating the complexities of stay violations can be challenging for collections teams, leading to confusion and potential errors. Successful companies adopt a streamlined and user-friendly system that reduces stay violation risks.

4. Uncollected Money

If your collections team is not receiving timely and accurate bankruptcy notifications, they may miss opportunities to file claims and collect funds from the bankruptcy estate. This means lost revenue and diminished recovery rates. Implementing a system that ensures prompt and accurate bankruptcy notifications can help your team maximize bankruptcy funds recovery.

To mitigate the legal and collections risks, it is essential to maintain compliance with bankruptcy laws and implement a streamlined, efficient system for managing bankruptcy filings and notifications. By adopting a proactive approach to bankruptcy compliance, you can avoid the pitfalls associated with stay violations and maximize your debt recovery efforts.