Stay Violation by a Creditor: 6 Remedies Under §362(k) and Their Limits

Section 362(k) is one sentence and a proviso, and the business that expects to wield it often learns that the sentence was written for someone else. Its operative noun is "individual." An LLC whose operating account is debited the morning after its petition has suffered the same act that would entitle a sole proprietor to damages, and the company's road to a remedy still runs through a different doctrine, a different standard, and a harder hearing.

Three remedies are written into the subsection. Three more sit beside it, and they exist because of what the subsection leaves out.

1. Actual Damages Are Mandatory Once the Violation Is Willful

The text of 11 U.S.C. 362(k)(1) reads: "an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." The verb is "shall." Once a court finds a willful violation and an injury, the award of actual damages is not a matter of grace.

Willfulness in this setting has been read to mean knowledge of the stay joined to an intentional act, which is a lower bar than it sounds. On that reading, the creditor need not have meant to break the law. It needs to have known about the case and done the thing.

The remedy belongs to the debtor, or, to be exact about the text, to "an individual injured," which is not quite the same class of people. The Second Circuit in In re Chateaugay Corp. (1990), construing the same sentence when it was numbered 362(h) (the 2005 amendments moved it to (k)), held that "the plain language of Sec. 362(h) prevents application of that section to benefit debtors that are not natural persons." A corporation or an LLC, in that circuit and in most courts, is outside the sentence.

That leaves the owner. Whether a guarantor who is not the debtor, and who absorbs the loss when the company's account is swept, counts as an "individual injured" within the subsection is a question the words invite and do not settle.

Actual damages also require actual injury. A violation that cost nothing measurable produces an order and little else.

2. Costs and Attorneys' Fees Travel Inside the Damages Award

The statute does not list fees as a separate remedy. It describes "actual damages, including costs and attorneys' fees," which places the fees inside the damages rather than beside them. Fees ride within the award the way a freight charge rides within the invoice for a pallet of Italian floor tile: they are real money, and they do not arrive without the shipment.

The practical consequence is that everything that limits actual damages limits fees. An entity debtor outside the word "individual" cannot recover fees under 362(k) at all, however much it spent stopping the debits.

3. Punitive Damages Wait on "Appropriate Circumstances"

The same sentence that says "shall recover" for actual damages says "may recover" for punitive ones, and only "in appropriate circumstances." Congress wrote a mandate and a permission into the same line, and the permission is the half creditors fear.

Paragraph (k)(2) narrows even that. If the violation "is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor," recovery "shall be limited to actual damages." Subsection (h) concerns an individual debtor's personal property and statement of intention, so the proviso matters most in consumer cases, and it tells a lender that an honest misreading of that provision caps its exposure.

4. For a Company, Civil Contempt Does the Work the Statute Declines to Do

Having held that the damages provision reaches only natural persons, the Chateaugay court did not leave corporations without recourse: "For other debtors, contempt proceedings are the proper means of compensation and punishment for willful violations of the automatic stay." The bankruptcy court there had awarded LTV Steel $7,600 in compensatory damages under the old 362(h), and the appeal turned on whether that section could support an award to a corporation at all. It could not. Contempt, under the court's power in section 105(a), was the door left open.

A federal bankruptcy court in New Mexico, surveying the question, quoted an earlier decision's count that "three circuit courts of appeals have acknowledged that corporate debtors may recover damages for stay violations through the civil contempt power of section 105," naming the Second, Ninth, and Eleventh Circuits. Some lower courts read "individual" more generously. Most do not.

The standard is the problem. The Second Circuit described the contempt rule it had applied before the damages provision existed: a party "generally would not have sanctions imposed for its violation of an automatic stay as long as it had acted without maliciousness and had a good faith argument and belief that its actions did not violate the stay." Under 362(k), an individual needs knowledge and an intentional act. Under contempt, a company must overcome a creditor's good faith argument, which is a different contest.

But the contest is shaped by the contract. A funder of merchant cash advances whose agreement describes a purchase of future receivables (and whose position, whatever a court eventually does with it, is that the money in the daily debit belonged to the funder before it ever reached the merchant's account, so that collecting it after the petition takes nothing from the estate) arrives at a contempt hearing carrying precisely the kind of argument the Chateaugay standard rewards. Whether those receipts are estate property or the funder's cash collateral is a question that depends on the documents and the court. The language the funder drafted to secure its advantage before the filing now serves as its defense after it, and the company that wants sanctions must first win the characterization fight the funder chose years earlier.

5. An Act Taken in Violation of the Stay May Be Undone

In 1940, in Kalb v. Feuerstein, the Supreme Court considered a state court that had confirmed a foreclosure sale of a farm while the farmer's bankruptcy petition was pending, without the bankruptcy court's consent. The state court's action, the Court held, "was not merely erroneous but was beyond its power, void, and subject to collateral attack." Kalb arose under the old Bankruptcy Act, and courts today differ on whether an act in violation of the 362 stay is void or only voidable, but in either version the act can be set aside.

Money is handled a little differently. Section 549(a) lets the trustee, or a debtor in possession exercising a trustee's powers, avoid a transfer of estate property that "occurs after the commencement of the case" and is not authorized by the Code or the court. A postpetition debit is such a transfer if the funds belonged to the estate, and avoidance returns the money rather than punishing the taker.

6. Turnover Reaches What Retention Alone Does Not

A creditor that seized property before the filing and holds it afterward has not, on that fact alone, violated the stay. The Supreme Court held in City of Chicago v. Fulton (2021) that "mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3)," and pointed to section 542 as the provision governing turnover. The remedy is a demand, then a proceeding to compel delivery. It is slower. It is also the correct one.

Where the Remedies Stop

Every remedy above presupposes a filed case. Before a petition there is no stay to violate and no 362(k) to invoke, and a creditor that keeps debiting a business in the middle of a private negotiation is breaching, at most, whatever standstill the parties signed. Delancey Street works in that earlier space: it pursues negotiated resolutions of business obligations, most often funder balances; being a negotiator and not a law firm, it cannot bring a contempt motion or a damages claim for anyone. A free and confidential first review from the company can help a business decide whether settlement or a filing makes sense, and it coordinates with independently licensed counsel on questions that turn legal. A business whose funder is debiting it after a petition has already been filed needs bankruptcy counsel that day, not a settlement company.

The stay is enforced by people who read it closely, and the remedies in its last subsection repay that reading unevenly. A statute that promises damages to an individual and contempt to a corporation has told us, without saying so, whom it expected to be standing in the courtroom.