Can I Seek Emotional Distress Damages in a Bankruptcy Case?

The question of whether a debtor can seek and obtain emotional distress damages in a consumer bankruptcy case might seem like an odd one given that most debtors are concerned primarily with getting debt under control and achieving a discharge. However, it is important to keep in mind that there are legal protections in place to protect debtors when creditors do not abide by federal bankruptcy law. Following other court, the Seventh Circuit Court of Appeals (which includes Illinois) has ruled that, in some cases, a debtor may be eligible to receive emotional distress damages when a creditor willfully violates the terms of the automatic stay in a personal bankruptcy case.

Why Would Emotional Distress Damages Come Into Play in a Bankruptcy Case?
Under Section 362 of the U.S. Bankruptcy Code, the automatic stay applies as soon as a debtor files for bankruptcy. The automatic stay prevents creditors from continuing with any attempts to collect on the debts owed by the debtor, from making phone calls to filing lawsuits. Indeed, any acts to collect debt or property are prohibited by the automatic stay. Section 362 also clarifies that “an individual injured by any willful violation of a stay . . . shall recover actual damages.” In other words, if a creditor willfully violates the automatic stay, the debtor can be entitled to receive actual damages.

In a number of cases over the last couple of decades, courts have been asked to determine whether “actual damages”—a term that points to compensatory damages—can include damages for emotional distress, a type of non-economic loss.

History of Case Law Concerning Emotional Distress Damages for a Willful Violation of the Automatic Stay

The Seventh Circuit was one of the first federal circuit courts to rule on the issue of whether emotional distress damages can be awarded to a debtor under Section 362 of the U.S. Bankruptcy Code in the case Aiello v. Providian Financial Corp. (2001). In this case, the debtor sought emotional distress damages after a creditor willfully violated the automatic stay. The Seventh Circuit had to determine “whether the term ‘actual damages’ is intended to include damages for purely emotional injury.”

In Aiello, Judge Posner of the Seventh Circuit clarified that a plaintiff who suffers a financial loss under Section 362 of the U.S. Bankruptcy Code “might be permitted to piggyback a claim for damages for incidental emotional distress.” In other words, when the emotional distress resulting from a creditor’s willful violation of the automatic stay stems from a financial loss associated with that violation, an award of emotional distress damages may be appropriate. Other courts have been much more vehement in making clear that “actual damages” do indeed include emotional distress damages.

For example, in the Ninth Circuit case Dawson v. Washington Mutual Bank (2004), the court reasoned that, in creating the law, “Congress was concerned not only with financial loss, but also—at least in part—with the emotional and psychological toll that a violation of a stay can exact from an individual.” In much more recent years, other federal courts have agreed and have applied similar reasoning.

Seek Advice From an Oak Park Bankruptcy Lawyer
If you believe you may be entitled to seek damages for a willful violation of the automatic stay, an experienced Oak Park bankruptcy attorney can help. Contact the Emerson Law Firm to learn more about how we can assist you.


See Related Blog Posts:

How to Deal With Debt in Retirement
Chapter 13 Bankruptcy and the Holiday Season

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