An object lesson for creditors: Countrywide Home Loans hit with $85000.00 in legal fees for violation of the automatic stay

On February 22, 2012, Judge Kaplan in the US Bankruptcy Court for the District of New Jersey hit Countrywide with an $85,000.00 tax bill for attempting to collect prepetition mortgage escrow deficiencies from debtors in Chapter 13 bankruptcies. In re Rodriguez, case no. 07-24687. The decision highlights the importance for all creditors not to “shoot first and ask questions later”.  Doing so, as Countrywide learned, can be expensive.

In this case, Countrywide claimed it was entitled to add to the post-bankruptcy mortgage payments an amount to pay back pre-bankruptcy shortfalls in the debtor’s escrow account. The debtors claimed this was an unlawful attempt to collect a pre-petition debt, and that the deficiency amount should have been included instead in Countrywide’s claim which would be paid in the bankruptcy. The debtors originally claimed that Countrywide was violating the “automatic stay” that renders illegal any attempt after a bankruptcy is filed to collect a debt that pre-existed that filing. The question went all the way to the Third Circuit Court of Appeals which ruled that Countrywide was wrong.

Under section 362(k) of the Bankruptcy Code, an individual who suffers any actual injury from a wilful violation of the automatic stay may seek damages, punitive damages and counsel fees. A violation is wilful so long was the collection effort was intentional and made by someone who knew about the bankruptcy. The Third Circuit sent the case back to Judge Kaplan to determine whether Countrywide wilfully violated the automatic stay and what damages the debtors were entitled to.

Here Judge Kaplan found that Countrywide wilfully violated the automatic stay because it proceeded, without seeking permission from the bankruptcy court, to demand payment of escrow monies after receiving notice of the bankruptcy filing. He hit Countrywide with payment of all the resulting counsel fees incurred by the debtors as they fought the issue up to the Third Circuit. Since Countrywide chose to litigate the issues, Judge Kaplan found, they should not be faulted for defending their rights.

This case underscores  important lessons for any creditor receiving notice of a bankruptcy:

1. Get qualified legal advice right away;

2. Do not attempt to collect the debt except through the bankruptcy court process, without first seeking permission and authority to do so.  When in doubt, err on the side of caution.

Steven R. Neuner has over 29 years of experience helping creditors, trustees and debtors protect their rights in bankruptcy court. For more information about these and related topics, see our website at

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