You took the plunge. You made the hard decision to file a bankruptcy case. You’re looking for a better life and more control over your finances. You received the discharge from the court, but creditors continue to call and send demand letters. You counted on the promise of freedom from creditor harassment to make your new life a reality.
Why are these creditors still contacting you, and what can you do about it?
Bankruptcy Automatic Stay
When you filed your bankruptcy case, you had a powerful tool in your arsenal. The “automatic stay” went into effect the moment you filed your case. It was an injunction that prohibited your creditors from taking any action to collect your debts while you were in bankruptcy. They are not allowed to:
- Send you letters, texts, or emails
- Repossess your collateral
- Foreclose on your home
- Continue or file a lawsuit
- Place a lien on your property
- Carry out any other similar activities
You should have noticed an almost immediate and substantial drop in these activities almost as soon as you filed. Some creditors, especially small “mom and pop” shops and, conversely, large bureaucratic organizations, have trouble integrating the bankruptcy notices and the fact that you filed into their systems.
It can take time, and sometimes, action by your bankruptcy attorney or even sanctions by the bankruptcy court to impress upon the creditor the seriousness of the proceedings and the need to stop the harassment.
Sometimes, clients may overlook the continued collection activity during the case, assuming that it will stop or that it has no meaning and isn’t worth the effort to correct the situation.
Unfortunately, those creditors are often the ones who don’t get the message at all, and when the discharge is entered, they will still be attempting to get you to pay the discharged debt.
The Discharge Injunction
When the court enters your general discharge order, the automatic stay is converted into a permanent discharge injunction under 11 U.S.C. § 524. This means that the creditor whose debt has been discharged can no longer take action to collect that debt. But there are circumstances in which the creditor can continue to contact you and even attempt to collect the debt.
Here are some of the actions a creditor might take after your bankruptcy case is filed or after your discharge:
- Suggest or pressure you to enter into a new debt to replace the old one
- Incorporate the old debt into a new loan (e.g. when refinancing a car loan)
- Attempt to collect debts that you verbally agreed to pay (with no reaffirmation agreement)
- Call or make written demands
- Refuse to show the debt as discharged on your credit report unless you pay the debt
- Send you notices of action on discharged debts
- Foreclose or repossess a property
- File a lawsuit
Discharged vs. Dismissed
Knowing when the creditor is legally justified, and when the debtor is actually violating the discharge injunction, depends on meeting some specific elements. If the case was dismissed rather than discharged, the creditor has the right to continue collecting the debt.
Bankruptcy cases will generally end either in discharge or a dismissal. The discharge is usually the intended result, relieving the debtor of the liability to repay dischargeable debts like credit cards, medical bills, personal loans, and even car and home loans (see below). But some cases don’t make it to the discharge stage and are instead dismissed.
There can be any number of reasons that a case is dismissed. If the debtor fails to complete his official paperwork, fails to provide the trustee with tax returns, does not attend his Section 341 meeting of creditors, or otherwise fails or refuses to cooperate with the trustee, the court will dismiss the case.
A Chapter 13 repayment plan case can be dismissed for all of those reasons, but also when the debtor fails to obtain confirmation of the Chapter 13 repayment plan or fails to make the payments or take other actions required under the repayment plan.
When the case is dismissed, in many ways it’s as if the case was never filed in the first place. Debtors lose the protection of the automatic stay, and creditors who were stayed can resume their collection efforts.
Some debts will not be discharged in a bankruptcy case. Some are automatically not discharged, and others will only survive if one of the parties asks the court to declare that the debt is not dischargeable.
Your discharge order issued by the court will not list the debts that are discharged, but your attorney will be able to clarify this for you. If the debt is not discharged, the creditor can resume collection efforts when the court enters the discharge order.
In general, these debts will not be discharged:
- Income taxes for the three most recent tax years
- Past-due child support and alimony
- Debts caused due to driving while intoxicated
- Student loans
- Fines and restitution in a criminal case
These debts will not be discharged if a creditor objects to their discharge:
- Debts from willful and malicious acts
- Some recent credit charges for cash advances or luxury goods or services
- Debts due to embezzlement, larceny, breach of fiduciary duty
- Debts you don’t list on your bankruptcy paperwork
Debts After Bankruptcy
If you opened a credit account or entered into debt after you have filed your bankruptcy case, chances are this won’t be discharged, and the creditor can attempt to collect it from you.
If you entered into that debt in connection with a Chapter 13 case (to purchase a new car, for instance), you’ll be required to include that debt in your Chapter 13 plan. Most likely, you’ll pay it off while you’re still in the case and have nothing to discharge at the end.
Keeping Property After Bankruptcy
Even your car and your house loans will be discharged in a Chapter 7 case, but your creditor will still have a right to take and sell your collateral. If you want to keep the property that secures a loan, you’ll have to continue paying for it until the loan is paid in full, even after your bankruptcy case is over.
You will probably enter into a reaffirmation agreement in which you and the creditor agree that the loan will not be discharged, and you will continue to be liable for the debt. If you later default, the creditor will have at its disposal the full range of collection actions, just as if the debt were never a part of the bankruptcy case.
Remedies for Bothersome Creditors
If a creditor is asking you for money after your bankruptcy case has been discharged, contact your consumer bankruptcy attorney immediately. Your attorney will help you determine whether the debt was discharged.
If it was discharged, and the creditor is acting in violation of the discharge injunction, your attorney will contact the creditor, either formally or informally, to demand that the creditor stop the collection activity.
If the creditor fails or refuses to stop, your attorney may ask the court to reopen your bankruptcy case and to sanction the creditor for its violation. You can also ask the court to order the creditor to pay any damages you might have suffered due to the collection activity.