At the conclusion of nearly all consumer bankruptcy cases the court will issue a permanent injunction prohibiting creditors from collecting on pre-bankruptcy debts. This permanent injunction known as the “bankruptcy discharge” replaces the “automatic stay,” a temporary injunction. Specifically, the discharge order prohibits discharged creditors from taking any kind of collection action against the debtor personally. The discharge injunction generally forbids a discharged creditor from sending bills, making collection phone calls, or filing a lawsuit to collect on a debt. This protection is final and permanent. Violation of the discharge injunction has serious consequences, and may result in a federal contempt of court charge.
A discharged debt is not erased. See In Re Mahoney, 368 B.R. 579 (Bankr. W.D. Tex. 2007)(“Bankruptcy does not erase debt; the discharge is only an injunction against attempts to collect the debt as a personal liability of the debtor. See 11 U.S.C. § 524(a)” see also In re Vogt, 257 B.R. 65, 70 (Bankr. D. Colo. 2000)). The debt still exists, but payment cannot be collected from the debtor because of the bankruptcy court’s injunction. However, a creditor may still have opportunities to collect.
Although a debtor is no longer personally liable for a discharged debt, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) during the bankruptcy case will remain after the debt is discharged. This is because enforcing the lien is an action against the property, not against the person. In this way the bankruptcy laws balance the interests of the debtor and the creditor. For instance, the bankruptcy discharge may prohibit an auto lender from garnishing a discharged debtor’s wages to satisfy an unpaid and defaulted loan, but the law allows the lender to repossess the vehicle. Bankruptcy attorneys are fond describing it this way: “secured property must be paid for or returned.”
The bankruptcy discharge does not protect non-filing co-debtors. The discharge injunction only applies to the debtor. A creditor may still enforce its collection rights against a co-debtor. Typically co-debtors are “jointly and severally liable,” which means that the non-discharged co-debtor is likely on the hook for 100% of the debt.
What happens when a creditor contacts the debtor after discharge? The answer depends on the situation and first involves answering three questions: (1) “Was the debt discharged in bankruptcy?” (2) “Is the collection directed at the discharged debtor?” and (3) “Was the creditor notified of the bankruptcy case or discharge?”
As stated previously, a discharged debt is no longer legally enforceable against the debtor. Some debts are not discharged, so it is important to understand which debts are included in the discharge and which are not. For instance, taxes, student loans, and family support obligations may not be subject to the discharge. In other cases a debt may be excepted from discharge by the court.
The discharge only protects the debtor from collection efforts. It does not protect a co-debtor who did not file bankruptcy, and, as a general rule, it does not protect property that is subject to a lien. For instance, a discharged creditor may not garnish the debtor’s wages to collect on a discharged debt, but may repossess collateral when a lien survives the bankruptcy discharge. Therefore, it is important to understand how property is affected by the bankruptcy discharge and whether a creditor can seize, repossess, or foreclose on the property after a bankruptcy.
As a practical matter, if a collector does not know about the bankruptcy discharge, the bankruptcy court is not likely to impose sanctions against it. Often a collection attempt can be resolved by informing the collector of the discharge and either providing a copy of the discharge or referring the collector to the debtor attorney. Buying and selling debt is big business, and debts often get passed from collector to collector – even uncollectable debts like those discharged in bankruptcy!
The bankruptcy discharge injunction applies to the original creditor, collection agencies, attorneys, and any other subsequent collector. A creditor may be liable for selling a discharged debt when the subsequent purchaser attempted collection action. See Laboy v. FirstBank P.R. (In re Laboy), 2010 Bankr. Lexis 345 (Bankr. D.P.R. 2010) (concluding that the original creditor had knowledge of the bankruptcy discharge and selling the debt some 15 years later to a debt collector violated the discharge injunction. Creditors “are obligated to maintain procedures to ensure that they do not violate [the discharge injunction], and may be held liable for damages and attorney’s fees if they do not”).