Filing a petition to request bankruptcy protection in federal court is an important way to seek relief from out-of-control debts. Filing invokes the automatic stay, which is a temporary injunction to protect the bankruptcy estate, the debtors, and the creditors until everything can be sorted out. In the end, most individual debtors will be granted a bankruptcy discharge that successfully eliminates many or all unsecured obligations.
Bankruptcy Discharge Order
While the discharge order is not technically the end of the bankruptcy case (that occurs when the case is closed), it is a major milestone.
Consumer debtors routinely file petitions under Chapter 7 and Chapter 13 because they cannot pay their bills as they become due. In those instances, the bankruptcy judge’s permanent order eliminates the petitioner’s legal duty to pay the discharged debts. Because the individual is no longer personally liable for the discharged debts, the affected creditors cannot attempt further collection. Creditors are prohibited from asking for money. In fact, any attempt by a past creditor or collection agency to seek payment on a debt that was fully discharged in bankruptcy violates the judge’s discharge order.
Who Is Stopped from Collecting on Discharged Debts?
A lot goes into administering the bankruptcy case before a discharge is possible. And it is the bankruptcy court’s discharge order that acts as a permanent injunction against debt collection of any kind as to the obligations stated in the order. The debts may still exist in a technical sense, but a bill collector may not attempt to seek payment. (Not all debts are dischargeable in bankruptcy, including domestic support orders (DSOs) and court fines. Speak with an experienced bankruptcy lawyer to learn more about nondischargeable debts.)
The discharge injunction applies to original creditors, any subsequent purchasers of the debt, third-party collectors, collection attorneys, and to anyone else who may attempt to collect on the discharged obligation. The discharge order prohibits any collection contact, such as mailing statements, telephone calls, creditor lawsuits, or garnishment proceedings. Violating this injunction may result in stiff penalties for federal contempt of court.
Who Is the Bankruptcy Debtor?
The discharge only protects the bankruptcy petitioners. Therefore, the court’s discharge order does not extend to a co-debtor who did not file bankruptcy (such as a spouse who co-borrowed on a home loan). The same is true of a guarantor who did not file (such as a parent who co-signed on a car loan). If you borrowed money to buy a car and your mother co-signed the loan, for example, then after your bankruptcy discharge the creditor can still sue and collect from the co-signer. Typically, co-debtors are “jointly and severally liable” which means they are equally responsible for the payment of the entire debt.
What Happens with Secured Debts?
While the bankruptcy discharge forbids collection against the petitioner, action against property pledged by the debtor to secure payment is allowed. The creditor may repossess the collateral if there was a valid lien. In some cases, the bankruptcy may strip off the lien, but the general rule is that secured property must be paid for or returned to the creditor. For example, the lender cannot garnish the debtor’s wages after the car loan is discharged, but can repossess the vehicle that was collateral for the loan. To keep the car, the debtor would have to reaffirm the debt in the bankruptcy proceedings. A reaffirmation agreement, which must be approved by the court, effectively removes the car loan from the list of discharged obligations.
There are many options for bankruptcy debtors. Not only in reaffirming debts, but in selecting the best available chapter for optimum results.
If you already received a bankruptcy discharge and are contacted by a creditor or collection agency, communicate this to your bankruptcy lawyer immediately. Sometimes it is a simple matter of giving notice that the debt has been discharged. While this is a technical violation of the discharge injunction, most courts will not impose sanctions unless the violation was intentional. The simplest way to resolve the matter is to inform the collector of your bankruptcy by either providing a copy of the discharge order or by referring the collector to your bankruptcy attorney.
Charles Laputka is a Bankruptcy attorney in Allentown, Pennsylvania. If you need help filing for Chapter 7 or Chapter 13 Bankruptcy, Laputka Law Office can help. Located in Allentown but willing to help statewide.
