Few things make a creditor more nervous than the words “automatic stay.”
Once a debtor files a bankruptcy petition, the stay kicks in and collection activity must grind to a halt to avoid exposing the creditor to liability. While the automatic stay prohibits creditors from attempting to collect on a debt, the stay does not eliminate the need to communicate altogether. Creditors typically still need to send certain account statements or provide other pertinent documents to a debtor about their account. But what should the creditor do when certain notifications may be in direct contravention of the automatic stay of the Bankruptcy Code?
The Fourth Circuit’s recent decision in Palazzo v. Bayview Loan Servicing, LLC, provides welcome clarity. The court held that sending certain statements and communications will not violate the automatic stay, provided the appropriate disclaimers are included.
The Case
Ruben Palazzo filed a Chapter 13 bankruptcy petition in February 2016, to reorganize his debts. During his bankruptcy, his mortgage servicers continued sending him monthly account statements and 1098 tax forms, along with payoff statements that Palazzo had personally requested. Palazzo sued, alleging that those communications were efforts to collect on a debt which are prohibited by the automatic stay and the Fair Debt Collection Practices Act (FDCPA). The district court ultimately sided with the mortgage servicer, which was upheld on appeal.
The Communications
The Court scrutinized the specific language in each of the communications. The Monthly Statements and Payoff Statements each provided a breakdown of the outstanding balance, the current interest rate, and other fees and amounts that would become due after the bankruptcy concluded. Critically, each statement included a prominent bankruptcy disclaimer that expressly notified the debtor that the statement was being sent “for informational and compliance purposes only” and that they were “not an attempt to collect a debt against [the debtor].”
The Court found that the disclaimers were “clear and unequivocal,” and that a reasonable reader in Palazzo’s position would have understood that no payment was being demanded. More importantly, Palazzo himself had requested the payoff statements, which undercut his argument that they were sent as an attempt to collect on a debt, rather than a ministerial response to his inquiry.
The 1098 tax statements similarly contained information about the interest paid and remaining principal for tax purposes. While those statements did not contain any specific disclaimers, the Court held that they were clearly being sent to provide information to a debtor, necessary for him to complete his taxes. Because of that, the Court found that providing those forms did not evidence an intent to collect.
Practical Takeaways
The Palazzo decision confirms what careful creditors have long practiced, and it offers a blueprint for anyone who needs to communicate with a bankrupt debtor.
- Use clear, prominent disclaimers. The single most important thing the servicer did right was include straightforward bankruptcy disclaimers in every communication. Those disclaimers were specific: they acknowledged the debtor’s bankruptcy, stated that the communication was for informational and compliance purposes only, disclaimed any intent to collect, and told the debtor not to send payment to the servicer. Place the disclaimer prominently—ideally at the top of the document—and use language that a reasonable reader will understand without effort. However, the Court made clear that there is no ‘one-size-fits-all’ approach. In another similar case, it noted that the disclaimer was not absolute and referenced the lender’s ability to foreclose on the mortgage lien. Although the communication expressly disclaimed the debtor’s personal liability, the Court found that its language indicated an intent to foreclose and therefore evidenced an intent to collect on a debt.
- Do not include demands for payment. A disclaimer loses its force if the rest of the document contradicts it. The monthly statements in Palazzo included payment coupons and listed future due dates, but those were clearly tied to post-bankruptcy obligations and were paired with instructions directing the debtor to pay the trustee instead. If the communication directs the debtor to deliver payment in contravention of a court order, or their bankruptcy plan requirements, a court may conclude that the disclaimer is window dressing.
- Respond to debtor requests—but document the request. The court gave significant weight to the fact that the payoff statements were sent at Palazzo’s own request. A creditor that provides information a debtor has asked for is not necessarily engaged in collection activity. Keep a record of those requests, but be sure to include disclaimer language.
- Distinguish informational communications from enforcement activity. The line the court drew is clear: informational communications with proper disclaimers are permissible; communications that announce an intent to enforce a lien or collect a debt are not, regardless of what the disclaimer says. Review your form letters and ensure they do not contain boilerplate language (such as “this is an attempt to collect a debt”) that contradicts your bankruptcy disclaimer.
- Offer an opt-out. The monthly statements told Palazzo he could stop receiving them by writing to the servicer. While the court did not rest its holding on this point, offering an opt-out reinforces the informational character of the communication and undercuts any argument that the creditor was trying to pressure the debtor.
Conclusion
Should a debtor allege a stay violation based on routine correspondence, the Palazzo framework provides a strong defense—so long as your communications contained proper disclaimers and did not demand payment. But be careful not to become complacent and treat all communications similarly. As noted, the Court paid particular attention to the exact wording of the disclaimers provided, and the facts surrounding those communications. As a result, careful drafting of form communications and periodic review of disclaimer language is important to ensure that there is no inadvertent violation of the automatic stay. Consult your attorney before sending notices to debtors who are in a pending bankruptcy proceeding or have received a discharge.
