The bankruptcy discharge offers powerful protection to people looking for a fresh start after a financial setback, or to hit the re-set button after getting tangled in a web of never-ending late fees and interest charges. While the bankruptcy discharge is most often associated with Chapter 7 bankruptcy, many consumers who file under Chapter 13 also receive a partial or full discharge of unsecured debt.
In 2018 (the most recent data available), Nevada Chapter 7 and Chapter 13 bankruptcy filers scheduled more than $1 billion in unsecured non-priority debt–the type of debt generally eligible for discharge in bankruptcy. But, what does it mean when debt is discharged? What happens to discharged debt after bankruptcy? And what happens if a creditor keeps trying to collect?
What is a Bankruptcy Discharge?
When a debt is discharged in bankruptcy, the bankruptcy petitioner is relieved of the legal obligation to pay that debt. Most people know they don’t have to pay debts discharged in bankruptcy. But, if you want to make sure you get the full benefit of your bankruptcy discharge, it’s important to understand a bit more about how the discharge works and what you can do if a creditor or debt collector continues collection activity after discharge.
Here are the key things you should know:
- The debt itself is discharged, which means it doesn’t come back to life because the creditor sold it to a debt buyer or passed it off to a collection agency. You may hear from unscrupulous collectors who will try to tell you that since they weren’t included in the bankruptcy, you still have to pay them. Never take a creditor’s or debt collector’s word on something like this–if you have any doubt about whether or not you are obligated to pay a specific debt after bankruptcy, check with your bankruptcy attorney.
- The bankruptcy discharge is a court order with power similar to the automatic stay. That means creditors and debt collectors who continue to pursue collections after receiving the bankruptcy discharge order are violating a court order. In some cases, they may be subject to sanction by the court and, in the worst cases, may even be required to compensate you.
- Mischaracterizing the status of a debt violates the Fair Debt Collection Practices Act (FDCPA). That means that a third party debt collector or debt buyer that claims a discharged debt is still subject to collection action or that you are still legally obligated to pay is breaking the law.
- Misreporting discharged debt to credit bureaus may violate the discharge order. Honest mistakes happen, but some debt collectors and debt buyers intentionally re-report discharged debt as outstanding to pressure the debtor to make payment in spite of the discharge. A creditor or collector that persists in misreporting discharged debt may be subject to sanctions and may also violate the Fair Credit Reporting Act (FCRA).
In other words, the bankruptcy discharge order continues to protect you after your bankruptcy case is over, if you understand your rights and what to do when someone violates the discharge order.
Contacted about Discharged Debt? Here’s What to Do
Of course, every situation is a bit different. If you’re in doubt or things get complicated, your bankruptcy attorney is your best resource for information about what your past creditors can and can’t do and how best to respond. Still, there are some basic steps that help protect the bankruptcy discharge.
1. Make sure you have a copy of your bankruptcy discharge order. If you don’t have the copy you received when the order was entered, you may be able to get a copy from your bankruptcy attorney, or you can request one from the court. The first step when a debt collector sends a letter or calls about discharged debt is typically to send the collector a copy of your discharge order.
Creditors listed in the bankruptcy petition should already have received the discharge order, but oversights happen. The debt may simply have been improperly coded in the creditor’s computer, the file may not have been updated with the discharge order, or the debt may have been passed to a collector or debt buyer who wasn’t listed. So, the first line of defense is generally to make sure that the creditor/debt collector is aware that the debt has been discharged and provide proof so they can update their files.
2. Dispute the debt if you get a collection notice about discharged debt. This is similar to the step above, but involves a formal process third party collectors are required by law to honor. You can find dispute letter templates in a variety of places online, including the Consumer Financial Protection Bureau (CFPB).
3. Check your credit report regularly. Unfortunately, discharged debt often crops back up on credit reports. Sometimes, it’s an honest mistake, like the miscoding discussed above. Sometimes, it’s a pressure tactic. Debt collectors and debt buyers know that some consumers will simply pay off a small debt to get it out of the “delinquent” section of their credit reports, even if they aren’t legally obligated to pay it.
But, many people don’t monitor their credit reports post-bankruptcy. If you’re not keeping an eye on your credit reports, you won’t know when discharged debt resurfaces and dings your credit score. And, you may be surprised by inaccuracies when you apply for credit.
4. Dispute inaccurate items on your credit report. The FCRA, like the FDCPA, imposes an obligation on both credit reporting agencies and those reporting information to them to investigate and make necessary corrections when a dispute is filed. One good source of dispute letter templates is the Federal Trade Commission (FTC). If an item is corrected or removed, stay vigilant. Sometimes items that have been successfully disputed reappear in later reporting cycles.
5. Consider pursuing a discharge violation in bankruptcy court. The bankruptcy court retains the power to enforce its discharge order, even if that means reopening a closed case. But, this is generally a last resort. The bankruptcy court will typically only punish a creditor or debt collector who has knowingly and intentionally violated the discharge order even after being offered the opportunity to fix the problem. But, if collection activity or inaccurate credit reporting continues or recurs in spite of notification and whatever disputes are appropriate, the bankruptcy court may be the next step.
At Haines & Krieger, we’ve helped thousands of people in and around Las Vegas resolve debts and fight back against creditor and debt collector harassment. To learn more about how we can help, call 702-903-1459 or fill out the contact form on this page. The initial consultation is free.