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Criminal Proceedings and the Automatic Stay

One of the most unique and perhaps most important features of the bankruptcy process is the automatic stay. The automatic stay, in section 362 of the US Bankruptcy Code, halts creditor collection of debtor assets. It is effective as soon as the debtor files for bankruptcy and provides the debtor breathing room to reorganize get out of debt.

Under certain circumstances, however, the Bankruptcy Code provides exceptions to the automatic stay wherein a creditor could continue collection actions against a bankrupt debtor, even though the debtor filed for bankruptcy. One of those exceptions is when a debtor is facing criminal prosecution. In such an instance, the debtor would still be afforded the privileges of the automatic stay yet will not have the automatic stay regarding that one issue.  

Criminal Actions

A significant exception to the automatic stay applies to a debtor facing the commencement or continuation of a criminal action. The idea of disallowing the automatic stay in such an instance reflects congressional intent that bankruptcy laws should not be used to shield debtors from criminal prosecution. In Kelly v. Robinson, the U.S. Supreme Court, in discussing judicial exceptions to discharge for criminal restitution orders, stated its “deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings.” It added: “The right to formulate and enforce penal sanctions is an important aspect of the sovereignty retained by the States. This Court has emphasized repeatedly ‘the fundamental policy against federal interference with state criminal prosecutions.’”

A question arises when debtors cite concerns of prosecutorial intent. For instance, a debtor is facing prosecution for passing bad checks. The prosecutor will point to the non-dischargeability of the debt because passing the bad check was a criminal act. In response, a debtor will argue that bankruptcy courts should not permit this exception to the automatic stay because, the debtor claims, the prosecutor is acting as a debt collector for particular creditors instead of a public servants. Furthermore, the result of collecting this debt will be inconsistent with the Bankruptcy Code because similarly situated creditors do not receive the same percentage dividend, thereby thwarting the distributive scheme of the Bankruptcy Code.

Some courts hold that the motivation of a prosecutor is not relevant because nothing in the Bankruptcy Code discusses prosecutorial motivation. Other courts take a different view and have crafted a variety of tests to determine whether a criminal prosecution should be stopped in such a circumstance. enjoined, including the bad-faith test, the irreparable harm test, and the principal motivation test. One of these tests are a primary motivation test, which takes a look at what the prosecutor is trying to do. Is the prosecutor acting as a debt collector? Or is the prosecutor looking to apply the law, regardless of the pending bankruptcy case? A court would consider these issues before determining whether the criminal action exception applies to the automatic stay.

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