Bankruptcy and automatic stays

During Chapter 13 bankruptcy proceedings, creditors in Minnesota and elsewhere are prohibited under federal law from pursuing further collection activities pending the court's ruling. A provision of the Bankruptcy Code provides that debtors who are harmed by a violation can obtain damages, including legal fees. A recent ruling by the U.S. Court of Appeals for the 9th Circuit overturned one of its prior decisions that had held that only legal fees incurred while attempting to end the stay were covered.

The ruling came as a surprise to many observers, who expected the court to maintain its previous position that bankruptcy debtors could only recover fees related to the actual breach itself, not in further prosecution to recover damages from the violation. The court's recent decision was predicated on the language of the Bankruptcy Code which explicitly states that debtors may recover any fees related to the breach and its redress. This brings it in line with every other court that has considered the issue.

This reversal by the court has placed creditors on notice that debtors who may until recently have elected not to pursue litigation for automatic stay violations due to lack of incentive to do so now have case law backing their claims, and may therefore be more proactive in pursuing such actions. This in turn grants debtors another avenue for protection from predatory creditors.

Chapter 13 bankruptcy allows a debtor who has a reliable source of income to propose a plan to reorganize debt. If approved by the court, existing obligations will be paid over a period of three to five years. If the plan is complied with, some of the remaining unsecured debt could be discharged. An attorney who has experience in bankruptcy law can advise a client of the eligibility and other requirements associated with Chapter 13.

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