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Here’s What You Need to Know about the Discharge of Your Debts under Chapter 7

The point of filing bankruptcy is to get relief from your debts. So, when and how DO those debts get “discharged”—legally written off—in a regular Chapter 7 bankruptcy?

 

Here’s what you need to know:

1.      You WILL receive a discharge of your debts, as long as you play by the rules. Under Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” except in relatively unusual circumstances:

  • If you’re not an individual!  Corporations and other kinds of business entities do not receive a discharge of debts, only human beings do.
  • If you’ve received a discharge in an earlier case too recently. You can’t get a new discharge of your debts in a Chapter 7 case if:
    • you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
    • you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
  • If you hide or destroy assets, conceal or destroy records about your financial condition.
  • If in connection with your Chapter 7 case you make a false oath, a false claim, or withhold information or records about your property or financial affairs.

2.      ALL your debts will be discharged, UNLESS a particular debt fits one of the specific exceptions. Section 523 of the Code lists those “exceptions to discharge.” I’m not going to discuss those exceptions in detail here, but the main ones include:

  • most but not all taxes
  • debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
  • debts which were not listed on the bankruptcy schedules on time
  • money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
  • child and spousal support
  • claims against you for intentional injury to another person or property
  • most but not all student loans
  • claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)                                                                                                                   

3.      A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524, the discharge order acts as a court injunction against the creditor from taking any action—through a court procedure or on its own–to “collect, recover, or offset any such debt.” If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay sanctions.

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What Stops a Creditor from Chasing You After Its Debt Has Been Written Off in Bankruptcy?

Even though it’s illegal for creditors to try to collect on a debt that’s been discharged (legally written off) in bankruptcy, once in a while they may try. What makes chasing a discharged debt illegal? And what penalties can get awarded to you if a creditor breaks the law?

 

In my last blog I wrote about Capital One Bank illegally filing documents in 15,500 bankruptcy cases demanding payment on debts which had already been written off in prior bankruptcies. This extensive pattern of bad behavior was discovered when the U.S. Trustee in Massachusetts learned about one case in which the Bank was trying to get payment from a couple whose $5,500 debt had been discharged in a bankruptcy 14 years earlier. The U. S. Trustee (an office of the U.S. Department of Justice which acts to protect “the integrity of the bankruptcy system”) came to realize that this was not an isolated event for Capital One, and sued the bank because of all of its illegal filings. Nobody—including Capital One–knew how many cases all over the country it had filed claims for money it was not owed. So as part of the settlement of that lawsuit, the bankruptcy court required Capital One “to hire an independent auditor, chosen by the court and paid for by Capital One” to do an audit of about 2.2 million claims that it had filed in bankruptcy cases from the beginning of 2005 through 2010. It is from this audit that Capital One’s 15,500 illegal filings were uncovered.

While the Bankruptcy Code makes it perfectly clear that trying to collect on discharged debt is illegal, it does not clearly say what, if anything, the penalties are for a creditor caught doing so. Section 524(a)(2) of the Code says a discharge of debts in a bankruptcy “operates as an injunction against” any acts to collect debts included in that bankruptcy case. But that section of the Code says nothing about what happens if a creditor violates that injunction. Feel free to read the whole section through the link above. Have fun—Section 524 goes on for pages!

Well, even though no penalties are specified in Section 524, there is a strong consensus among courts all over the country that bankruptcy courts can penalize creditors for violating the discharge injunction through another section of the Bankruptcy Code, Section 105, titled appropriately enough “Power of Court.” The basic idea is that the injunction against pursuing a discharged debt is a court order, and so a creditor violating it is in contempt of court. So the standard penalties for being in civil contempt of court apply.

Depending on the circumstances, the penalties for civil contempt can include “compensatory” damages and “punitive” damages. Compensatory damages are to compensate you for harm you suffered because of the creditor’s violation of the injunction. These potentially include actual damages such as time lost from work or other financial losses, emotional distress caused by the illegal collection, and attorney fees and costs you’ve incurred as a result. Punitive damages are to punish the creditor for its illegal behavior, and so the judge looks at how bad the creditor’s behavior was in determining whether it punitive damages are appropriate and how much to award.

The vast majority of the time creditors in a bankruptcy case write the debts off their books and you never hear about those debts again. But, as the Capital One story illustrates, some creditors don’t keep good records or simply aren’t all that vigorous about following the law. So if, after you receive your bankruptcy discharge, you hear from one of your old creditors trying to collect its discharged debt, contact your attorney right away.  It’s something that you want to nip in the bud. And if the creditor’s behavior is particularly egregious, you and your attorney may want to discuss whether to strike back at the creditor for violating the law. There might possibly even be some money in it for you.

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Audit Shows Capital One Bank Illegally Filed $24.7 Million in Claims for Debts Previously Discharged in Bankruptcy

One can understand if a major U.S. credit card company forgets that one of its customers had earlier written off that company’s debt in bankruptcy. But forgetting this very important fact for 15,500 of its customers?!?

It is bad enough that Capital One lost track that its old debts had been legally written off (“discharged”). But in each one of these 15,500 cases it didn’t bother to check if the debts were discharged, and so it actually filed documents in subsequent bankruptcy cases asserting that the debts were still legally owed. Each of these “proofs of claim” were dated and signed by a Capital One representative, with the signature right next to this statement: “Penalty for presenting fraudulent claim: Fine of up to $500,000 or imprisonment for up to 5 years, or both.” Now, I don’t think anyone is alleging that Capital One is purposely and fraudulently chasing stale debt, but they sure are being awfully negligent in their internal recordkeeping, or maybe even reckless in blindly chasing debts without bothering to find out if they are still legally owed.

This whole ugly mess was uncovered by the “U.S. Trustee.” People filing bankruptcy may hear that the U.S. Trustee is somebody who is not on your side, mostly someone who can turn your Chapter 7 case into a Chapter 13 one if you don’t follow the rules. But its watchdog role is much broader–it “protects the integrity of the bankruptcy system by overseeing case administration and litigating to enforce the bankruptcy laws.“ Obviously, a creditor filing a document in a bankruptcy case saying that it is owed money when it not is in violation of the bankruptcy laws. Doing this in 15,500 cases is majorly bashing the integrity of the bankruptcy system, and causing havoc to “case administration.”

How so? Think about it. A creditor’s proof of claim is generally considered accurate unless somebody challenges it. The creditor usually attaches some documentation, which makes the debt look authentic. The debtor usually has little incentive to spend time or money on the issue because usually that proof of claim does not change how much the debtor has to pay, instead only how the creditors will divide up the money. When Capital One gets paid on a false claim in an asset Chapter 7 case or a Chapter 13 case, that inappropriate payment reduces the trustee’s payouts to all the other creditors, the amount of reduction depending on the size of each one of the other creditors’ claims. So now in 15,500 individual cases Capital One has to give back whatever money it actually received—amounting to $2.35 million—and the trustee in each case has to precisely recalculate how much each one of the other creditors was short-changed, and then cut checks for all those other creditors in those amounts. What a huge waste of time.

What does this mean for you? As to Capital One, if it is or was one of your creditors and you are (or will be) in either a Chapter 13 case or asset Chapter 7 case, have your attorney keep a close eye on any proofs of claim this creditor files. As to creditors in general, this is good reminder that creditors sometimes file inaccurate documents—purposely or not—in bankruptcy court. Proof of claims specifically, and other documents as well (such as motions for relief from stay) need to be scrutinized carefully, not just accepted as face value. Much of the time most creditors keep decent records and file accurate documents in court. Just don’t assume all of them do all the time. Especially Capital One.

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Don’t Get Disqualified from the All-Important “Automatic Stay”

In VERY RARE circumstances, ALL of your creditors can pursue you even if you file bankruptcy. Here’s how to avoid those rare but dangerous circumstances.

In my last blog I listed three special classes of debts for which you can still be pursued in spite of filing bankruptcy. They are exceptions to the automatic stay, the broad protection from creditors that you get immediately when your bankruptcy case is filed.  But in this blog today I’m talking about a circumstance in which the automatic stay does not apply to your case AT ALL, regarding ANY of your creditors. And about another circumstance that you can lose the protection of the automatic stay 30 days after your case is filed. 

Because of the huge importance of the automatic stay, you absolutely want to avoid these circumstances, as rare as they might be.

For anybody who is thinking about filing a bankruptcy and has NOT had a previous bankruptcy case filed in their name in the last year, and then dismissed, you can stop worrying about this. Or if you have already filed a bankruptcy case recently and I’m getting you worried here, stop worrying if you did NOT have a previous bankruptcy case filed in your name, and then dismissed, in the year before your present case was filed.

But, IF you filed TWO OR MORE prior bankruptcies in the year before your new one, AND they were dismissed, the automatic stay does NOT go into effect with the filing of the new case.  The automatic stay CAN go into effect AFTER the case is filed if certain conditions are met.

Or, IF you filed ONE prior bankruptcy in the year before your new one, the automatic stay EXPIRES 30 days after the filing date, unless certain conditions are met before then. 

The details of the conditions for imposing or preserving the automatic stay are beyond the scope of this blog. What IS of immediate and absolute importance is that you must tell your attorney—AT the BEGINNING of your INITIAL CONSULTATION—if you have filed ANY prior bankruptcy cases, and especially any recent ones.

Now if you’re wondering who goes around filing multiple bankruptcy cases in one year?—it happens more often than you might think.  It tends to come up two ways: 1) A person files a bankruptcy without an attorney, gets overwhelmed by the process and doesn’t follow through, so the case gets dismissed. 2) Or a person hires an attorney, signs some papers, and the case gets filed, maybe without the person even realizing it, and then gets dismissed because he or she (or the attorney, for shame) doesn’t follow through. In either case, eleven months later they’ve forgotten all about it. Or don’t think it’s important.

The point of these anti-automatic stay rules is to stop “serial bankruptcy filers,” the very, very small minority of folks who filed multiple bankruptcy cases, arguably abusing the bankruptcy process, usually to repeatedly delay a foreclosure or some other creditor action.  But these rules can also seriously penalize innocent people in situations like the ones I just mentioned.

Avoid this happening to you by 1) thinking carefully about whether there is ANY possibility that you filed a prior bankruptcy case within the last year, and 2) then telling your attorney if there’s ANY chance that you did. If so, there’s a good chance the bankruptcy court can be persuaded to impose or retain the automatic stay, but only if your attorney knows about the issue in advance and determines whether your case so qualifies.

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