Woody Webb of The Edmisten & Webb Law Firm in Raleigh, North Carolina has been an attorney associated with the rent-to-own industry for over twenty three (23) years principally on behalf of ColorTyme, Inc. and its franchisees.

The typical, common sense reaction, at least in the bankruptcy context, has been to request some proof of the customer having declared bankruptcy.

Sometimes there are risks inherent in assuming that the law will provide a commonsensical answer to various human conduct and activity. For a longtime, those of us involved in commercial transactions, whether it be rental-purchase or straight retail, have had to deal with the customer who asserts that he cannot make a payment because he has been sick, because he has been laid off, because he was in an accident. Not infrequently the customer says that he is going to declare bankruptcy or that he has already declared bankruptcy. Quite often these assertions are truthful and other times they are not - which is why they are rarely taken on face value.



The typical, common sense reaction, at least in the bankruptcy context, has been to request some proof of the customer having declared bankruptcy. Dealers quite reasonably have placed the burden on the customer to provide some evidence that he has indeed filed a bankruptcy petition. In the absence of such evidence (which has not included the mere declaration by the customer), dealers have seen no reason to abandon collection activities. Well, there is a reason, and it was recently stated with absolute certainty in one of my cases in the United States Bankruptcy Court for the Eastern District of North Carolina.



As I hope everyone knows, an automatic stay goes into effect immediately upon the filing of a bankruptcy case. The stay prohibits all entities from “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case.” Believe it or not (and, you better believe it), such acts are invalid even though the creditor had no notice of the bankruptcy case.



“No notice” does not equate to “no knowledge.” In other words, while bankrupt customers do not have to produce actual notice of bankruptcy (e.g., a Court filing, an attorney’s letter, etc.), they do have to say, “I have filed a bankruptcy case.” At that point the burden shifts to the dealer to discover whether or not the customer has been truthful and really has a bankruptcy case. Blowing off a customer’s assertion of having declared bankruptcy and continuing to pursue collection/repossession activities may well lead to a Court determination that a dealer intentionally and willfully violated the automatic stay resulting in actual damages, attorney’s fees, and, in appropriate cases, punitive damages.



In sum, “disbelief of a debtor’s filing because his or her statement is unaccompanied by other proof or corroboration is no defense to a willful violation of the stay. Rent to Own dealers who ignore the statements of debtors who claim to have filed bankruptcy, act at their own peril when collection efforts are continued after receiving such notice.” So, when presented with this situation, ask the customer who his bankruptcy counsel is, or if that information is not forthcoming, simply call the United States Bankruptcy Court closest to you and request a clerk to search the docket for a filing under the customer’s name. Document all your efforts to ascertain whether a customer has in fact declared bankruptcy.



A final word on this subject, the Court does not place any burden on the dealer when a customer makes a general statement that he “might” file bankruptcy. At least that makes sense.

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