Why Creditors Very Seldom Try to Collect a Debt after It’s Been Discharged in Bankruptcy

Creditors do not usually chase a debt once it has been discharged in bankruptcy because they can be, and have been, punished if they do.

The Court Order Discharging Your Debts

In most Chapter 7 and 13 bankruptcy cases, the primary goal is to get a discharge — a legal write-off — of your debts. This happens near the end of a successful case, when the bankruptcy judge signs a formal court order declaring that your debts are discharged. This court order makes illegal any attempt whatsoever by your creditors to collect on a discharged debt.

Effect of a Creditor’s Violation of the Discharge Order

But sometimes creditors do disobey the law. As a gross example of this, a couple of years ago Capitol One Bank admitted to trying to collect on about 15,500 debts totaling more than $24 million that had been discharged earlier in bankruptcy.

The Bankruptcy Code gives its judges the open-ended power to “tak[e] any action or mak[e] any determination necessary or appropriate to enforce or implement court orders or rules. . . .” Under this power, the bankruptcy judge can respond to a creditor’s violation of the discharge order by holding the creditor in contempt of court and then punishing the creditor.

The nature of the punishment would depend on whether the creditor’s collection efforts intentionally violated the discharge order, did so recklessly or negligently, how aggressively it acted and what damages it caused. The creditor can be ordered to pay compensatory damages to compensate the debtor for any damages it caused by pursuing the discharged debt. The compensatory damages often include the debtor’s attorney’s fees incurred for fixing the problem. The violating creditor may also have to pay punitive damages, intended to teach the creditor not to violate discharge orders.

Violations of the Discharge Order Do Not Happen Often

Most people filing for Chapter 7 or Chapter 13 bankruptcy do not have their creditors chasing them after their debts have been discharged by the bankruptcy judge. But it does sometimes happen. One of the many benefits you get from hiring the attorneys at Bailey & Galyen is that you have us in your corner if it does actually happen.

So if you live in the Dallas-Fort Worth metroplex, please schedule a no-obligation, free, confidential consultation with us today at 800-208-3104. Or you can reach us here. You can then decide for yourself whether you want to have us in your corner for this and all the other aspects of the bankruptcy process.