Bankruptcy Liability Discharge: In Personam vs. In rem. PART II of II

09 Mar Bankruptcy Liability Discharge: In Personam vs. In rem. PART II of II

In my first Blog, we explained the differences between in personam and in rem liability and how a discharge affects in personam liability, but not in rem liability. In this part II, we get a little more technical on what the elimination of the in personam liability is all about.

So let’s make it a little more confusing. For example, take a car loan that was included in a bankruptcy for which a discharge was entered. After a discharge is granted, the debtor no longer needs to pay the car. The personal liability is gone.

But what happens if the payments are stopped? Repo man comes! This is because the lien on the car remains and if the debtor wants to keep the vehicle, he needs to satisfy the lien with the monthly payments. So while the debtor no longer owes the money, the money is still owed to prevent repossession of the cart and payments must still be made to satisfy the lien.

To take it to another level, and by way of example, look at the Uniform Commercial code. Article 3 deals with negotiable instruments while article 9 deals with liens. In a typical mortgage, there are usually two items: a note and a mortgage/deed of trust. The note is the underlying liability. The deed of trust is the security for the liability.

A note without a deed of trust would allow a debtor to keep their home after bankruptcy without any liens! But to secure the note, all lenders require a mortgage or deed of trust. They start with an article 3 negotiable instrument, then they add to that the protection of a lien thru article 9. So a bankruptcy will always eliminate the article 3 personal liability, it has nothing to do with the article 9 security interest.

Let’s add some more confusion now. Does the Bankruptcy eliminate the debt whether there is a lien or no lien? Is the debt gone? No! Huh? Doesn’t this contradict everything I just said? Not exactly. Pay attention to the words chosen. Elimination of personal liability versus elimination of the actual debt.

Courts have continuously ruled that the debts still exist. The creditors are free to consider such debts on their books. They just can’t collect on the debts. So essentially, the bankruptcy has created “unenforceable debts.” The bill collector can do whatever they want with these debts, except collect on them against the debtor personally. So yes, the debt is still there, the creditor is still owed money, but the creditor just simply can not collect the money from the debtor personally.

What about a credit report? Can the bill collector still report the debt? Most bill collectors would argue yes. They would argue that mere reporting without anything further is not an attempt to collect the debt as a personal liability against the debtor. But the problem with that argument is that credit reports are not 10-k financial statements for the bill collector.

The only purpose for the credit report is to publish the financial risks of the debtor for others to make decisions on extending credit to the debtor. In other words, the credit reporting of a balance owed after filing bankruptcy is per se FALSE. Credit reports report the personal liabilities of the debtor. By reporting such liabilities, debt to credit rations are established, available remaining credit is ascertained, ability to timely pay personal obligations is assessed, and a variety of other items reported.

But it makes absolutely no sense to report a balance owed after discharge since the debtor no longer has a personal liability obligation on that debt after discharge. In addition, reporting a balance owed after bankruptcy also runs contrary to the FCRA, FDCPA, FCBA, FTC Commentary, FDIC, CDIA reporting standards, METRO II, and other state and federal laws. In fact, there is no legal authority whatsoever to report a balance after bankruptcy, unless the underlying debt was declared non-dischargeable or reaffirmed.

So the bottom line is that a bankruptcy operates to discontinue collections as a “personal liability of the debtor,” but does not eliminate the actual debt nor remove any pre-bankruptcy lien on property. While there are a few occasions where liens can also be removed, lien removal proceedings are rare and for another blog.

If you think that a creditor is still attempting to enforce their debt as a personal liability against you, chances are you have a discharge violation under 11 USC 524. When in doubt, always speak with your attorney of record for the Bankruptcy, as creditors are routinely sanctioned for violating the discharge injunction.

Written by Michael G. Doan

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