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.
