WHAT'S THE AUTOMATIC STAY?
The Automatic stay is one of the most important benefits of filing Bankruptcy. It stops ("stays") most collection efforts against you and your assets as of the moment you file your bankruptcy case. It goes into effect immediately—automatically—upon the filing, almost always without need for a court order. See The Value of the Automatic Stay elsewhere on this website. The many broad kinds of collection actions stopped by the automatic stay are listed in Section 362(a) of the U.S. Bankruptcy Code.
WHY ARE THERE EXCEPTIONS TO THE AUTOMATIC STAY?
The law has determined that there are certain situations when special kinds of creditors or other adversaries can take limited actions against you regardless of your bankruptcy filing. Or they can continue taking action that they started before your filing. The specific reason for each exception is different. But generally, with each exception there are compelling reasons why that particular action should be allowed to continue.
I will discuss the various exceptions, and the reasons for them, in the next few blog posts. Today we start with a number of exceptions applicable to Criminal proceedings, certain governmental actions, and specifically actions by taxing authorities.
DOES BANKRUPTCY STOP CRIMINAL PROCEEDINGS AGAINST ME?
No, it doesn't. Your bankruptcy filing "does not operate as a[n automatic] stay--. . . of the commencement or continuation of a criminal action or proceeding against the debtor." Section 362(b)(1) of the Bankruptcy Code. Bankruptcy does not protect you from criminal procedures at any of its stages. This includes, for example, criminal arrest, indictment, plea bargaining, trial, sentencing, appeal, incarceration, probation, and parole. The automatic stay simply does not apply to such criminal procedures.
HOW ABOUT DEBTS RELATED TO CRIMINAL MATTERS?
Criminal fines and restitution are obligations that are also not protected under the automatic stay. Their collections are considered part of the "continuation of a criminal action or proceeding" which can proceed regardless of your bankruptcy filing. This generally includes the collection of any of the many other possible criminal fees and charges that a criminal court may impose upon you as part of your sentence or probation.
WHAT ABOUT TRAFFIC-RELATED VIOLATIONS?
This automatic stay exception for criminal debts can apply to matters less serious than misdemeanors or felonies. It may apply to more ordinary situations that you might not consider to be "criminal." The most common examples are traffic violations and their resulting court proceedings and fines. To the extent these are criminal proceedings and criminal debts, the automatic stay does not apply.
However, the line between criminal and civil proceedings isn't always clear. Some violations of motor vehicle laws are considered criminal and some civil. Also, the violation of virtually the same law could be considered criminal in one state but not in another. To further complicate this, some situations may involve both civil and criminal violations. Whatever proceedings or resulting money owed that are considered civil would be stopped (at least temporarily) by filing bankruptcy filing, while those considered criminal would not.
WHY DOES BANKRUPTCY NOT STOP CRIMINAL PROCEEDINGS AND COLLECTION OF CRIMINAL DEBTS?
The vast, vast majority of debts are civil debts. You owe or allegedly owe some specific creditor. But debts arising from criminal proceedings are the result of alleged violations against "the people" or "the state," so you owe the resulting criminal fines or restitution to society or to the state. Bankruptcy is a civil proceeding. The accepted principle is that it's not appropriate for a person to write off his or her criminal "debt to society" or to the state through the civil proceeding of bankruptcy.
ARE THERE OTHER EXCEPTIONS TO THE AUTOMATIC STAY INVOLVING GOVERNMENTAL DEBTS?
Yes, those involving taxes likely comes to mind when thinking about governmental debts. Will get to those shortly. But there's another exception worth mentioning that usually only applies to business bankruptcies, only occasionally to individual debtors. It's the "regulatory power" exception.
The automatic stay does not apply to:
. . the commencement or continuation of an action or proceeding by a governmental unit … to enforce such governmental unit's or organization's police and regulatory power ….
Section 362(b)(4) of the Bankruptcy Code.
This governmental "police and regulatory power" exception applies to the government's enforcement of laws affecting health, welfare, morals, and safety. "The theory of the exception is that bankruptcy should not be 'a haven for wrongdoers.' " In re Universal Life Church, 128 F.3d 1294, 1297 (9th Cir. 1997) (citations omitted).
In this example from Northern California, a Chapter 13 debtor applied for and was denied a neighborhood parking permit and annual vehicle registration because of unpaid parking tickets. In re Thomas, 355 B.R. 166, 170 (N.D. Cal. 2006). The court on appeal determined that the government could, under the police and regulatory powers exception, require the debtor to pay the parking fines before being able to get the parking permit and register his vehicle. "The legislative history of the police and regulatory powers exception and relevant case law demonstrate that the government may validly act to protect public safety, even if there is a monetary component to the government's actions." 355 B.R. 166, 174.
WHAT ABOUT TAX COLLECTION? ISN'T THAT COVERED BY THE AUTOMATIC STAY?
Yes! It's important to understand that most tax collection actions are immediately stopped by the automatic stay. The IRS and state and local tax agencies are just like any other creditor in many respects. They have to immediately stop writing collection letters or calling you when you file a bankruptcy case. They can't start or continue garnishing your wages, recording tax liens, or executing tax levies on your property. Tax agencies can't require you to enter into monthly installment payments or continue paying on prior payment agreements. They have to respect the automatic stay just like everybody else . . . with a few important, mostly sensible exceptions.
SO WHAT ARE THOSE SENSIBLE TAX EXCEPTIONS?
Essentially, these exceptions allow tax agencies to take action during your bankruptcy to determine the amount of tax you owe but not to collect the tax. The automatic stay does not prevent the IRS/state from taking the following four kinds of actions:
- Start or finish a tax audit "to determine tax liability." See Section 362(b)(9)(A) of the Bankruptcy Code.
- Send you a notice about the amount of tax that you owe—a "notice of tax deficiency," but without requiring payment of that amount. Section 362(b)(9)(B).
- Demand that you file your tax returns, as required under tax law. Section 362(b)(9)(C).
- Make an "assessment" of your taxes and issue a "notice and demand for payment" (Section 362(b)(9)(D), but again take no further to collect that tax.
Notice how all of these four types of actions enable the IRS/state to figure out the amount of tax due but not collect on that amount.
IS THERE A SEPARATE AUTOMATIC STAY EXCEPTION FOR TAX REFUNDS OWED TO YOU?
Yes, the final exception being covered here applies to the special situation of tax refunds. If the IRS/state owes you a tax refund as of the time you file your bankruptcy case, it may be able to keep it to pay towards a tax debt you owe. A tax agency may be able to do a setoff of the amount it owes you—the refund—and apply it to the tax you owe it. In other words, this is a narrow exception allowing tax collection in spite of the taxpayer's bankruptcy filing.
Setoffs are usually a violation of the automatic stay. Bankruptcy usually stops "the setoff of any debt owing to the debtor that arose before the commencement of the [bankruptcy] case . . . against any claim against the debtor." Section 362(a)(7) of the Bankruptcy Code. In other words, usually the automatic stay would stop the IRS/state from grabbing "a debt owed to the debtor"—a pre-bankruptcy tax refund—and applying it to "any claim against the debtor"—a tax owed by the debtor.
But the tax refund exception allows for
"the setoff . . . of an income tax refund, by a governmental unit, with respect to a taxable period that ended before the date of the [bankruptcy filing] against an income tax liability for a taxable period that also ended before the date of the [bankruptcy filing]."
In other words, the IRS/state can use your tax refund to pay a tax debt you owe, assuming:
- it hasn't yet given you that refund (it's still a debt it owes you)
- both the tax refund and tax owed are for tax years that "ended before the date of the [bankruptcy filing]"
