I’m Still Being Collected Upon By A Discharged Debt. Now What?

10 Feb I’m Still Being Collected Upon By A Discharged Debt. Now What?

Collecting upon a discharged debt is a violation of the Discharge Injunction under 11 USC 524. In the Ninth Circuit, it is punishable by contempt. In the Southern District of California Bankruptcy Court, up until this last week, a lawsuit, called an Adversary Proceeding, could be filed in the Bankruptcy Court to sue the offending Creditor. Not anymore!

Last week, Judge Bowie issued two separate written opinions, one of which will be published, which basically states that you can no longer sue a creditor who is suing you on a discharged debt. This is because, according to Judge Bowie, there is no “private right of action.”

Instead, the proper procedure is to apply to the Court to issue an Order To Show Cause. Through this procedure, the Bankruptcy Judge, in his discretion, will evaluate your claim against the creditor, and then decide whether it is worthy of issuing an order to bring the creditor to court to show cause why it should not be held in contempt.

If the judge decides your case is not worthy, end of story. There is no other remedy, you go home. Maybe if the creditor continues the wrongful conduct you might attempt to request the court again to issue an order to show cause and be successful with the later request.

In the event the judge issues the order to show, and the creditor is eventually found in contempt, it then becomes a question of what is the remedy. The judge then has the sole discretion to enter any order or process under 11 USC 105 to remedy the wrongful conduct.

This may be a monetary sanction where the offending party must pay the debtor a certain amount of money. It may be an injunction to enjoin further wrongful conduct. Or it may simply be a verbal warning. Total discretion remains with the judge.

Why the new procedure ending lawsuits? The Court looked to the infamous case of Walls v Wells Fargo and basically relied upon that case for the holding. Moreover, the court felt that by filing a lawsuit against creditors for their wrongful conduct, it may have a “terrorizing effect on them.”

Terrorizing effect? Hmm, lets see. Creditor breaks the law, debtor complains to court for the garnished wages, bank levies, etc, and Court doesn’t want the creditor to feel “terrorized” by the lawsuit for the wrongful conduct?

Bad, bad, debtors! How dare they terrorize these creditors!

Well, another appeal will be filed so we will see what a higher court decides.

Written by Michael Doan

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