Breadth of the Automatic Stay

The filing of a bankruptcy, in most cases, creates the “automatic stay” of 11 USC §362 (and sometimes §1301). The automatic stay bars a creditor (with a few exceptions) from taking any collection action against the debtor or property of the debtor without Bankruptcy Court permission. Many people underestimate the breadth and depth of the automatic stay.

I have a current client who took her taxes to be prepared before she filed her bankruptcy. Now the tax preparation service refuses to give her back her tax documents (W-2, 1099, 1098, etc.) until she pays for the preparation of her tax returns.

Can they do this? No, this violates the automatic stay. Pre-petition debt, check. Demand for payment of the pre-petition debt, check. Exercising control over property of the estate — the papers themselves and arguably the tax refunds — to compel payment of the pre-petition debt, check. This tax preparation service is going to be on the wrong end of a contempt motion shortly.

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