When Is A Violation Of The Bankruptcy Discharge NOT A Violation?

Collection efforts after bankruptcy are illegal. Pretty simple stuff, actually - if a debt is discharged, nobody can collect from you for ever and ever, amen.

The trick is to know what happens if a creditor does, in fact, try to collect after bankruptcy. Are they breaking the bankruptcy laws and, if so, what is the penalty?

Most courts have held that there is no private remedy for the violation of the discharge injunction. The remedy is by bringing a lawsuit for contempt of a court order, which leads to sanctions and an award of legal fees. It’s a different car, but it still gets you where you need to go.

In order to be held in contempt of a court order, a party must have actual, and not just constructive, knowledge of discharge injunction in order to be held in contempt for violating it. That’s the basis of due process, which ensures that people are treated fairly in court. In other words, you can’t be held in contempt of the discharge violation if you didn’t have actual knowledge of the discharge.

In the recent case of In re Gunter, 2008 WL 2440623 (Bkrtcy.S.D.Ohio 2008) the U.S. Bankruptcy Court for the Southern District of Ohio held that a debt collection lawyer who did not have actual notice of the bankruptcy discharge had violated the terms of the law, but could not be sanctioned for the violation. In other words, they let the debt collector off the hook.

But here’s where it gets interesting. The debtor collector had been served with the discharge order when it was issued, but that occurred before it had been hired to collect the account. The court effectively discounted that notice as being irrelevant, tantamount to receiving the wrong person’s junk mail.

The debt collector testified that it never bothered to check PACER (that’s the online federal court record-keeping system) to see if the debtor had filed for bankruptcy before it began collection activities. The court noted that doing so is “certainly a prudent practice,” but held that “a debt collection firm . . . generally does not have a duty to determine whether an individual from whom it is attempting to collect has commenced a bankruptcy case, and it would be unreasonable to expect collection firms to do so in every instance. This stands in contrast to the Fair Debt Collection Practices Act, which requires debt collectors to adopt reasonable procedures in their collection activities.

The upshot? Debt collectors have to adopt reasonable procedures, but that doesn’t include a routine check of bankruptcy court records. Over the past decade well over 10 million consumers have filed for bankruptcy, so it’s reasonable to assume that at least some of those people still have accounts floating out there for collection. It’s like telling someone not to speed, but also telling them that there’s no need for them to check their speedometer as they drive down the highway.