The bankruptcy discharge is the goal of bankruptcy.

Having been through the financial wringer and having been proactive to get out from under old bills,  debtors hope for a tranquil and prosperous life after bankruptcy.

Then, life intervenes.

• A debt buyer calls demanding payment
• Discharged debt remains on the credit report
• The IRS levies your bank account
• Your wheels are repossessed
• Foreclosure threatens a deficiency judgment

So, just what behavior on the part of your creditors, or former creditors, violates the bankruptcy judge’s order that your debts are discharged?

What was discharged

We’ve got to start with the question of what was really discharged.

Not all creditors get discharged in bankruptcy.

Further,  the discharge wipes out your personal liability, but not necessarily creditor liens on your assets.

And the discharge order itself is useless in telling what was discharged.

So, here’s what your former creditors can and can’t do once you get your discharge.

Bankruptcy discharge no-no’s

Zombie debt back from the dead

In a world where disappointed creditors sell their uncollectable debt to debt buyers, debt wiped out in bankruptcy is often included in the sale.

But all too often, the debt buyer gets nothing that tells him about the bankruptcy discharge.

Thankfully, the debt buyer gets no better rights than the seller had.  If it was discharged when the seller owned it, it remains discharged in the hands of the buyer.

And while innocent efforts to collect discharged debt are still prohibited, you won’t get much relief from a bankruptcy judge unless the debt buyer is told the debt is discharged and then persists.

Then, you have a suit for sanctions.

Liens after bankruptcy

Unless the bankruptcy judge voids a lien, a secured creditor’s interest in your pre bankruptcy assets survives the discharge.

The tricky thing is that, after bankruptcy, the creditor can only enforce its claim to the asset.  It can’t get a judgment against you for any shortfall.

And, its letters and lawsuits in connection with enforcing its lien rights can’t threaten a judgment against you, or claim that you are liable for its attorneys fees or other collection costs.

Many discharge violation suits are successful against secured lenders because lenders are careless about what their form letters say about their rights and your obligations.

Debt you reaffirmed

Car lenders got special, advantageous treatment in the 2005 bankruptcy “reform” act.

After bankruptcy, it is no longer enough to keep paying on your car loan.  Just the bankruptcy discharge itself is a default of the loan terms.  Gotcha!

So, to make doubly certain that the car lender doesn’t pick up the car because of your discharge, debtors reaffirm the debt.  The car is then safe from repossession.

But fall behind on the reaffirmed debt, and it’s as if you’d never filed bankruptcy as to this debt.  The lender can, lawfully, repo the car and sue you for the difference.

Community property gets a discharge

Debtors in community property states get an extra measure of protection from the bankruptcy discharge.  Even when only one spouse gets a discharge, all of the community property is forever protected from the discharged community debts.

Can’t tell you how often creditors violate the community property discharge.  But they do, it’s wrong, and it can be expensive to the bungling creditor.  One of my clients effectively got a $400,000 benefit from a creditor’s violation of §524.

Mortgage servicing screwups

In a rare gift to consumers, the 2005 bankruptcy amendments made it a violation of the discharge for a mortgage servicer to fail to properly credit payments made on a home loan during a Chapter 13.

(i) The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.  § 524(i)

This remedy is limited to payments “received under a plan”…. so we’re talking about Chapter 11, 12, or most likely Chapter 13.

Another reason I love Chapter 13.

What doesn’t violate the discharge

Credit reporting errors

Most bankruptcy courts have held that failures to properly report discharged debt to credit reporting agencies doesn’t constitute a violation of the discharge injunction.

It might well violate the Fair Credit Reporting Act, but absent facts showing improper reporting intended to collect a discharged debt, it’s not a favored complaint in bankruptcy court.

Failure to foreclose

Underwater property or junker cars are the bane of debtor’s existence.  And despite the necessity to file a notice of intentions concerning assets securing debt, checking the surrender box on the bankruptcy form doesn’t make the property someone else’s.

Secured creditors can sit on their hands, and their rights, apparently unchecked, under our law, and the collateral continues to belong to the debtor after bankruptcy.

Collection against guarantors

The discharge is unique to the person who filed bankruptcy.  You may discharge your personal liability on a debt, but if someone else is also liable on the debt, that liability lives on despite your bankruptcy discharge.

Protecting cosignors with Chapter 13

Collection of debts not discharged

And, of course, if the debt wasn’t discharged in the bankruptcy case, it remains collectible after the case is over.

The automatic stay may temporarily prevent collection, but once the stay is dissolved, by the debtor’s discharge or the closing of the case, a creditor whose claim survives is free to collect according to state law.

Stand up for your rights

Get full measure from your bankruptcy discharge.  If you think that creditors are violating your discharge, get legal help.

Too many debtors endure discharge violations without fighting back.

More

How to enforce your discharge

The famous poem begins, “how do I love thee? let me count the ways”.

But what if it’s not love that we are counting, but loathing?

Let me count the ways I loathe the Motley Fool’s article asking should I file for bankruptcy?

The underlying assumption is that people in debt flock to bankruptcy as an “easy way out”, and damage their credit score for seven years or more.

This is so wrong, where do I start?

Who files bankruptcy

No one I’ve met in 38 years as a bankruptcy lawyer arrived in my office on a whim to make their financial life easier with a “get-out-of-jail-free” card.

Instead, they’ve agonized about even considering bankruptcy.  They feel guilty and ashamed. 

Often, they’ve delayed learning about bankruptcy so long that they’ve made their situation even worse.  Not only has their financial situation worsened while they tried to find a way to pay, but their health and their relationships have deteriorated.

The most common triggers for financial distress are job loss; illness; business failure; and divorce.  None are exactly choices made frivolously.

Drowning in debt

The premise of the Fool’s article is that you are up to your eyeballs in bills.  If that’s your situation, the remedies the author proposes are band-aids on a gut wound.

• Get a second job
• Cut your living expenses
• Negotiate with your creditors

All of these suggestions are sound, standing alone.  But they are inadequate remedies for someone truly drowning in debt.

If the rising water is at your knees, fine.  These might work.  But if the water’s at your chin, this is fantasy.

And all of them are offered without discussion of the age, health and family situation of the person in debt.  Neither does the author address the size of the debt and the time required to pay off the debt.   Much less, discuss the ongoing interest on the unpaid balance.

Realities of negotiating with creditors

The logic of a creditor settling for less than is owed, rather than get nothing in bankruptcy, is rock solid.  Only, little logic is found in the collection departments of most creditors.

They’ve heard the threat to file bankruptcy before.  It doesn’t phase them.

And the people you can get on the phone to discuss a reduction in the debt generally don’t have the authority to make the deal, much less the vision to see the benefits of a deal.

Debts get easier to settle the older and stinkier they get.  So, stop paying for long enough and some creditors will come to the negotiating table.

But getting all your creditors to reduce their claims is nearly impossible.

And there’s no discussion of where you’re going to get the money to pay off the reduced debt, nor the time to engage creditors in negotiations.

Protecting the credit score

The utter irony of the Fool’s approach is that you should avoid bankruptcy to protect your credit score!  Truly foolish.

Your credit score is an arbitrary and unregulated construct, created by businesses working for creditors, to measure the cost to you of incurring more debt.

Granted, it’s now used in other enterprises for which it wasn’t designed, and, I would argue, not particularly predictive of whether you’ll pay your rent, for instance, or commit insurance fraud.

Isn’t the point of discussing bankruptcy alternatives to get you out of debt?  Not enable you to get into more debt?

Unaddressed is the current impact of repayment strategies on your credit score.  Suppose to get a creditor to negotiate, you have to stop paying altogether, so they see that your situation is dire.

There’s a hit to your credit score, right there.

And the score won’t begin to improve until all that’s behind you.  No discussion by the Fool of how long that may take.

Living on a financial knife edge

Personal finance writers all tout saving.  Whether it’s an emergency reserve or retirement savings, no ethical financial expert proposes that you spend every penny you have, with nothing in reserve.

Yet the Fool omits any assessment of whether the money spent paying off old debts would be better off creating a financial cushion, which would be possible after a bankruptcy discharge.

My bankruptcy clients too often have neither savings, nor health insurance, nor health care.  I suggest that a better future requires those things, not a robust credit score.

Bankruptcy misrepresented

Finally, the Fool repeats myths about bankruptcy.

The author claims that “your major assets are sold off” in Chapter 7.

Nonsense. Nearly 98% of Chapter 7’s result in no loss of the filer’s assets.

Between exemptions and the lack of real equity, most people in bankruptcy don’t have assets that are saleable by a bankruptcy trustee.

Chapter 13 is a repayment plan, but that plan may pay little or nothing to creditors, depending on your income, living expenses, or the equity in your assets after a deduction for exemptions.

How Chapter 13 payments are figured

The very debts that the author warns may not be wiped out in bankruptcy are the debts that are paid first from any money flowing through the bankruptcy estate.  The priorities for payment in bankruptcy see that secured debt, recent taxes, and support are paid before the run of the mill unsecured creditor.

Student loans, the bane of many struggling Americans, are the exception.  They aren’t generally dischargeable in bankruptcy, but they don’t have a priority for payment.  Bankruptcy for a student loan borrower may only wipe out other debts, making it easier to pay off student loans.

What does it cost to stay in debt

The Fool is quick to point out that filing bankruptcy costs money.  That in fact is the first of the downsides of bankruptcy that the author highlights.

There’s no mention of the cost, both monetary and emotionally, of remaining in debt.

While the author notes that bankruptcy appears on your credit report for years and is visible to potential employers and landlords, absent is any evaluation of how a credit report full of delinquent, or even just overwhelming debt, impacts those same parties.

Negative information about a debt  can be reported for seven years.  Not so different than bankruptcy.

Your balance sheet matters

When assessing your financial health, your credit score is secondary.  First of all, look at your balance sheet, not your ability to borrow more money in the short run.

Look at the demands on your income, your age, and your prospects when picking a get-out-of-debt strategy.

Understand that your credit heals with time, and a bankruptcy on your record is not a bar to getting new credit.  A recent bankruptcy affects the price you pay for a loan;  a bankruptcy years ago fades in significance.

And that’s why, for many people, I love the fresh start provided by bankruptcy.

More

What Kenny Rogers tells us about getting out of debt

What bankruptcy should cost

Credit heals

Why I love Chapter 13

Life after bankruptcy

The weapons of a debt collector are fear, shame, and annoyance.

The weapon delivery system is communication.

Those weapons don’t have to be any more threatening than a plastic toy pistol, if you understand what’s going on.

To use those emotional weapons, the collector needs to get to you, either by phone or in writing.

They need to stir those negative emotions in the hope of getting you to pay them instead of some other pressing need.

Disarming the debt collector

Turns out, you have a weapon of your own.

It’s paper, but it works.

Invoke your legal right to be left alone and you disarm them.

Afraid to answer the phone

The woman on my phone was petrified about the balance on her husband’s credit card.

A mid life stroke and he was in a nursing facility; she was supporting the family singlehandedly.  The credit card issuer wrote that she had only 10 days to pay or they’d refer the matter to their attorneys.

Paying the credit card was not a priority at the moment, but they had convinced her the world would end if she didn’t pay now.

I proposed a letter of her own:  claim the right to be left alone.

Getting collectors to stop

The Fair Debt Collection Practices Act has a hidden gem:  the right to be left alone.

FDCPA is federal law.  It applies to outside collectors for the original creditor.  It doesn’t apply to the original creditor using in-house collectors to get you to pay.

California doubles down and makes the same right to be left alone apply not just to a third party collector but to the original creditor as well.  The law is known as the Rosenthal Act.

Cutting off communication doesn’t make the debt go away.  It doesn’t keep the creditor from suing on the debt, if they really want to do so.

It does keep them from ratcheting up those emotions, fear, shame and annoyance, that may lead you to pay the wrong bills first.

Debt collectors make the most money if they can get you to write them a check to go away.  It’s much cheaper and faster than suing you.

Much less likely to send you scurrying for bankruptcy.

How to do it

To mute the collector, you must put your demand in writing and send it to the collector.

There are two magic phrases: either “stop communicating with me” or  “I refuse to pay“.

Either one, in writing, cuts off the collector’s right to harass you.  See 15 USC 1692c(c) and Cal. Civil Code 1788.17

There are a couple of exceptions, things the collector can legally communicate after you send that letter.

1. They can tell you their efforts are being terminated.
2. They can tell you what kinds of remedies remain available to them.

That’s it.

Remedies if they break the law

There’s no meaningful right if there is no remedy.  so the law arms you to enforce your rights.

FDCPA creates small but powerful remedies;  the Rosenthal Act adopts them.

A debt collector who violates the law is liable to the victim for

• Actual damages
• Statutory damages up to $1000
• Attorneys fees and the costs of suit

A successful enforcement action requires that you assemble evidence:  a copy of the letter you wrote; a log of collection actions after that letter that violate your rights; and an account of the damages that those violations caused you.

A consumer rights lawyer can help you vindicate your right to be left alone.

What to do when it’s quiet

Once your adrenaline goes down, and you can think about your debts without fear, you can look at the big picture.

• Is your debt problem bigger than this one creditor?
• Is your cash situation likely to change significantly in the near term?
• Are you crippling your budget to pay creditors at the expense of essentials?
• Do you have a financial reserve if there’s an emergency?

If the problem is bigger than the creditor on the phone, see a reputable, non profit credit counselor or an experienced bankruptcy lawyer to explore your option.

More

Are there alternatives to bankruptcy

Considering bankruptcy

If you get sued