Consumer debtors file bankruptcy for many of reasons, but all ultimately want the same thing: a discharge of their debts. Stated very generally, a bankruptcy discharge operates to remove the personal liability of a consumer debtor from his or her pre-petition debts. Depending on whether a debtor files Chapter 7 or Chapter 13 bankruptcy, they can obtain a discharge within a few months after filing bankruptcy or following the completion of a five year plan of reorganization. During bankruptcy, a debtor is protected by the automatic stay. It operates as an injunction against acts to collect prepetition debts while a debtor’s bankruptcy case gets sorted out. Following discharge, a similar injunction comes into place which protects a discharged bankruptcy debtor from creditor claims on discharged debts – the discharge injunction. Like litigation related to the automatic stay, defending claims related to violations of the discharge injunction presents its own challenges.
The discharge injunction is specifically codified at 11 U.S.C. § 524. It ensures the fresh start of a discharged bankruptcy debtor by “operat[ing] as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor … .” A violation of the discharge injunction must be “willful” in order to be actionable. In the Eleventh Circuit, the willfulness requirement is satisfied if a “creditor: 1) knew that the discharge injunction was invoked; and 2) intended the actions which violated the discharge injunction.” See In re Nibbelink, 403 B.R. 113, 120 (Bankr. M.D. Fla. 2009). Notably, a creditor does not have to intend to violate the discharge injunction itself, just the action which ultimately violated it.
Violations of the discharge injunction are remedied through the statutory contempt powers present in 11 U.S.C. § 105. See In re Hardy, 97 F.3d 1384, 1390 (11th Cir. 1984). Pursuant to those powers, courts have awarded actual damages and punitive damages, along with reasonable attorney’s fees and costs. See Nibbelink, 403 B.R. at 120 – 122.
A TYPICAL SCENARIO
Consumer purchases a home via a mortgage loan with Mortgagee. One year later, Consumer files for Chapter 7 bankruptcy protection. Mortgagee receives notice of the bankruptcy case. Consumer has no assets to speak of, so the Chapter 7 case wraps up rather quickly and Consumer receives a discharge two months later. Mortgagee is mailed notice of the discharge from the bankruptcy court. Under the law, Consumer is no longer obligated to pay the mortgage. However, Mortgagee still retains its mortgage lien on the home and needs to foreclose in order to recoup what it can from the mortgage transaction. In doing so, Mortgagee sends out a notice of default to Consumer. Unfortunately, the notice of default does not acknowledge the bankruptcy discharge in any way. Instead, it conspicuously states that Consumer is in default, is due and owing for several months’ worth of payments, and must pay that amount within 30 days or risk losing the home. Upon receipt of the notice, Consumer contacts his bankruptcy attorney. Shortly thereafter, an adversary proceeding is filed in the bankruptcy court against Mortgagee alleging a violation of the discharge injunction.
When Mortgagee receives the Summons and Complaint related to Consumer’s adversary proceeding, its options are already limited. Unlike many causes of action where arguments related to liability can be immediately asserted in defense, violations of the discharge injunction often do not provide any safe harbors. If a creditor is on notice of the bankruptcy case and discharge, then any action taken following the discharge that amounts to an act to collect is the equivalent of a willful violation of the discharge injunction. Mortgagee’s seemingly innocuous notice of default letter, which was likely sent only to satisfy the statutory predicate to foreclosure, suddenly becomes a damage inducing liability. In many courts that single letter violation can garner several thousand dollars in damages, which, in addition to being astonishing, also highlights the true difficulty in discharge injunction violation cases – attorney’s fees. It is not uncommon for a debtor’s attorney to accumulate several thousands of dollars in fees by merely filing a complaint, engaging in initial discovery and participating in settlement negotiations. Moreover, it is often the case that all of those fees are approved by a court. In Consumer’s case, it would not be unheard of for the bankruptcy court to award $1,000 in actual damages for the letter, and $2,000 in fees to Consumer’s attorney.
AN OUNCE OF PREVENTION
Clearly, the best way to avoid violating the discharge injunction is to do just that – take no actions to collect (or which can be construed as acts to collect) following a debtor’s discharge. However, accidents can and will occur. For that reason, taking preventive or mitigating actions beforehand is the best way to avoid finding yourself as a defendant in one of these suits. The most important action a creditor can take is to institute a rock solid system of dealing with incoming bankruptcy notices. Once those notices come in they need to be given immediate attention and a debtor’s account needs to be coded to reflect the filing and eventual discharge of the debtor. Another strong practice is to include detailed and prominently displayed bankruptcy disclaimers on all correspondence to debtors. Many creditors include these disclaimers in their letters; however, much of the time the disclaimer is buried in the boiler plate or back page of a letter in small type font. The best disclaimers are present on the first page of a letter and clearly explain that the letter’s intention if received by a discharged debtor is not to collect a discharged debt. In any event, an experienced bankruptcy attorney can help guide you through both avoiding and defending a discharge injunction case.