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When Creditors Call after Bankruptcy Discharge

MICHIGAN CHAPTER 7 & CHAPTER 13 BANKRUPTCY: THE DISCHARGE INJUNCTION

 

The discharge of debt received at the end of a successful Chapter 7 or Chapter 13 bankruptcy proceeding is one of the most powerful civil remedies available under US law.

 

The “bankruptcy discharge” is a permanent injunction under Federal law that essentially requires that any creditor to whom you owed money prior to the filing of the Chapter 7 or Chapter 13 case, cease and desist any action constituting the collection of that debt—permanently.

 

First, there are exceptions to what sorts of debts can be discharged in bankruptcy. For example, some non-dischargeable debts include child support arrearages, obligations to an ex-spouse arising from a Michigan divorce judgment, government criminal penalties, recent tax liabilities, and student loan debt where a Bankruptcy Court has not specifically determined that they are dischargeable.

 

What all of these non-dischargeable debts have in common is that they are not dischargeable for only one reason: the US Bankruptcy Code states that they are not dischargeable.

 

The Bankruptcy Code is the final statutory word as to what debts are or not discharged in Chapter 7 or Chapter 13 bankruptcy. Michigan state law and even other Federal statutes—such as the IRS Code—do not play a role (although they can provide guidance to Bankruptcy Court Judges in their decision-making).

 

For purposes of this article, we will presume that the debts in question were dischargeable and were discharged in the Chapter 7 or Chapter 13 proceeding under discussion.

 

However, it is important to clarify the difference between Michigan State and Federal Bankruptcy law as it is a primary point of confusion not only for lay-people—but also for many the non-bankruptcy collection attorneys employed by creditors.

 

And this is why they call. Even after the bankruptcy discharge forbids them from doing so.

 

THE BANKRUPTCY DISCHARGE INJUNCTION: CONTEMPT OF COURT & SANCTIONS

 

When a creditor attempts to collect a discharged debt, the eventual course of action is to file a motion to reopen the Chapter 7 or Chapter 13 bankruptcy case, if it has been closed by the Bankruptcy Court, in order to file a motion for a finding that the creditor is contempt of the Court’s Discharge Order, entitling you to sanctions in one form or another.

 

That is a mouthful of legal jargon, but the underlying rule is this: There is no individual cause of action for a violation of the discharge injunction.

 

The discharge of debt received at the end of a successful Chapter 7 or Chapter 13 bankruptcy proceeding is one of the most powerful civil remedies available under United States law.

 

The discharge injunction is an Order of the Court. Only the Court carries a cause of action for a breach of its Order. The discharged debtor files a motion not for damages as in a civil lawsuit but essentially to bring the creditor’s actions in violation of the Discharge Order to the Court’s attention.

 

The debtor requests that the Court find the creditor in contempt of its Order—and then asks for damages—injunctive or money damages—as a form of the Court’s sanctions for the creditor’s misbehavior.

 

CHAPTER 7 & 13 BANKRUPTCY DISCHARGE VIOLATION: CALL YOUR BANKRUPTCY ATTORNEY

 

A creditor holding a discharged debt may call because they don’t know that you’ve received a Chapter 7 or Chapter 13 bankruptcy discharge, first of all.

 

It is important, both legally and logically, to inform the creditor of the bankruptcy discharge if it is unaware of it.

 

It is legally important because the Bankruptcy Court in both the Eastern and Western Districts of Michigan will not grant a sanctions award if the creditor acted unknowingly and in what it will call “good faith.”

 

When a creditor holding discharged debt (whether the original creditor or a debt buyer that has purchased the discharged note from the original creditor) attempts to collect from you, the first thing you should do is contact the Michigan bankruptcy attorney who represented you in your Chapter 7 or Chapter 13 case.

 

Your bankruptcy attorney will contact the offending creditor and provide, as an attachment to a warning letter, a copy of the notice of Chapter 7 or Chapter 13 bankruptcy filing and Notice of Discharge.

 

Different attorneys facing different creditors may allow for a few “warning shots” of this sort before proceeding with a Motion for Contempt—but that is the eventual path forward if the creditor fails to cease and desist.

 

Why would a creditor refuse to cease collections?

 

It is often because the attorney representing the creditor does not believe that their client is subject to the Bankruptcy Court’s Order of Discharge.

 

This can happen because the creditor and its attorney just don’t understand that the Federal Bankruptcy Code preempts the Michigan or other state law that their claim is rooted in. With luck, they can be educated. If not: your bankruptcy attorney will move for sanctions in the Bankruptcy Court and they will learn the hard way.

 

It can also happen because you failed to disclose one or more of your debts to your bankruptcy lawyer in your original Chapter 7 or Chapter 13 case.

 

When that happens, the debt doesn’t get listed in your Bankruptcy Petition Schedules listening your debts. If the debt isn’t “scheduled,” the creditor will not receive notice of the bankruptcy filing from the Bankruptcy Court.

 

This is the sort of “innocent mistake” for which the Bankruptcy Court will not grant sanctions if the collecting creditor backs off when informed.

 

However, there is firm case-law on the books holding that an unsecured creditor who was not listed in the debtor’s schedules and properly notified of the bankruptcy and the issuance of the discharge is discharged nevertheless.

 

This is not a matter of statute, and non-bankruptcy collection attorneys—even good ones—may not be aware of this.

 

Some post bankruptcy collection calls are not from legitimate debt collectors or real creditors at all.  Criminals posing as debt collectors will sometimes contact people and will threaten immediate bank or wage garnishments or even arrest if payment is not made immediately over the phone with a debit card, credit card or wire transfer.  These scam artists frequently are collecting for prior payday advance loans and their con can be very convincing.  They will usually have relevant information about a person they are targeting such as their social security number, date of birth, address and other personal information.  For more information on these collection scams, click here.

 

POST-BANKRUPTCY DISCHARGE COLLECTIONS: THE BOTTOM LINE

 

The bottom line is that, if you are considering filing for bankruptcy and wondering whether or not you need a lawyer to assist you, you should consider the future beyond your bankruptcy discharge.

 

You may wade through a bankruptcy proceeding without professional assistance, but, when a creditor missteps months or years (or years and years) after your Chapter 7 or Chapter 13 discharge, you need to know who to call.

 

If you worked with an expert bankruptcy lawyer, you will call that lawyer—and the time that elapses between creditor contact and tough, professional response will be very short.

 

If you did not retain an attorney for your Chapter 7 or Chapter 13, you will have a very difficult time finding an attorney who will be willing to assist you unless the creditor has acted egregiously, entitling you to large damages—and the attorney to a guaranteed fee payment.

 

Attorney Walter Metzen is a Board Certified Bankruptcy expert and has assisted thousands of consumers with Chapter 7 and Chapter 13 bankruptcies. His concern and care for his clients does not fade when the Bankruptcy Court issues the Order of Discharge.

 

The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13 bankruptcy case in metro Detroit.