The Bankruptcy Discharge Injunction, Secured Interests, Violations and Sanctions
After a Debtor receives the Order of Discharge from a Judge in a bankruptcy proceeding, the Automatic Stay provisions of the Bankruptcy Code prohibiting all acts directed at collecting pre-bankruptcy petition debt, terminate. This does not mean that the discharged debtor is without any defense from those seeking to collect pre-petition debts. The Bankruptcy Code provides continuing protection from creditors in the form of a discharge injunction. The discharge injunction is authorized by section 524(a)(2) of the Bankruptcy Code. It provides that a bankruptcy discharge "operates as an injunction against... an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived...." 11 USC § 524.
The discharge injunction is permanent, survives the bankruptcy case and is always applicable with respect to every debt that was discharged. A Senate Report explains the impact of the injunction:
The injunction is to give complete effect to the discharge and to eliminate any doubt concerning the effect of the discharge as a total prohibition on debt collection efforts. This paragraph ... cover[s] any act to collect, such as dunning by telephone or letter, or indirectly through friends, relatives, or employers, harassment, threats of repossession and the like.
S. REP. No. 95-989, at 182-83 (1979).
Although the bankruptcy discharge eliminates a debt as a personal liability, it does not affect a lien that provides security for the debt. See § 522(c)(2). Since 1886, the law has been settled that a discharge in a liquidation bankruptcy case (a chapter 7 case under present law) does not discharge a lien against real or personal property; liens survive or pass through bankruptcy unaffected. See, e.g., Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991); Long v. Bullard, 117 U.S. 617, 620, 6 S.Ct. 917, 918, 29 L.Ed. 1004 (1886). In Long, the lien survived because the Bankruptcy Act of 1867, § 20 provided that secured debts were not provable, except to the extent of a deficiency.
The Supreme Court expressed the principle as follows in Johnson:"Notwithstanding
the discharge, the [secured creditor's right to proceed against [the debtor] in rem survived the
Chapter 7 liquidation." 501 U.S. at 80, 111 S.Ct. 2150. The Supreme Court described the
nature of the security interest that survives a chapter 7 liquidation as follows:
A mortgage is an interest in real property that secures a creditor's right to repayment. But unless the debtor and creditor have provided otherwise, the creditor ordinarily is not limited to foreclosure on the mortgaged property should the debtor default on his obligation; rather, the creditor may in addition sue to establish the debtor's in personam liability for any deficiency on the debt and may enforce any judgment against the debtor's assets generally. A defaulting debtor can protect himself from personal liability by obtaining a discharge in a Chapter 7 liquidation. However, such a discharge extinguishes only the personal liability of the debtor. Codifying the rule of Long v. Bullard, the Code provides that a creditor's right to foreclose on the mortgage survives or passes through the bankruptcy.
Id. at 83, 111 S.Ct. 2150 (citations omitted); cf. Cox v. Zale Delaware, Inc., 239 F.3d 910, 914 (7th Cir.2001) (the effect of rescinding a reaffirmation agreement as to a secured debt is that the debt is discharged but the creditor retains its security interest). A chapter 7 discharge extinguishes only one mode of enforcing a claim, an action in personam against the debtor. It leaves intact the right to proceed in rem against the property. Johnson, 501 U.S. at 84, 111 S.Ct. 2150. This difference is reflected in the statutory scope of the automatic stay and the discharge injunction.
While the automatic stay prohibits any act to enforce a lien against property of the estate, there is no comparable provision in the discharge injunction. Thus the bankruptcy discharge eliminates the personal liability of the debtors on the debt, and converts the loan into a non-recourse loan. See id. at 86-87, 111 S.Ct. 2150. The lien on the property, however, remains, and the creditor may proceed to enforce the lien to the extent authorized by state law. Once the bankruptcy discharged is entered, the case is dismissed or relief from the Automatic Stay is granted.
Violate the Discharge Injunction at Your Own Peril and that of your Client’s
The Courts will defend discharged debtors, and punish creditors and their attorneys, who are found to have violated the discharge injunction. "Section 524(a) is a broad injunction power which effectively bars creditors from collecting debts as personal liabilities from a discharged debtor." In re Meyers, 344 B.R. 61, 64 (Bankr.E.D.Pa, 2006). Unlike the Automatic Stay provisions (§ 362 of the Bankruptcy Code), § 524 does not contain an express provision authorizing an award of actual damages as a remedy for violations of the discharge injunction. See In re Hardy, 97 F.3d 1384,1389 (11th Cir.l996)(Section 524 "does not specifically authorize monetary relief.") and In re Nassoko, 405 B.R. 515,520 (Bankr.S.D.N.Y.2009) ("Section 524 does not include an explicit enforcement mechanism.").
Historically, Courts have referred to the remedy provided by § 362(k) as a private right of action, and noted the absence of a parallel provision in § 524. "[I]n contrast to section 362(h)[now § 362(k) ], which remedies violations of the automatic stay by mandating actual damages,... section 524 is silent with respect to a private right of action for debtors injured by a creditor's violation of the discharge injunction." In re Meyers, 344 B.R. at 64."While the Third Circuit has not addressed whether section 524 implies a private right of action, it has observed that several other circuits have found that it does not. See In re Joubert, 411 F.3d 452, 456 (3d Cir.2005) (citing e.g. Cox v. Zale Delaware, Inc., 239 F.3d 910, 917 (7th Cir.2001); Bessette v. Avco Financial Services, Inc., 230 F.3d 439, 444-45 (1st Cir.2000); Pertuso v. Ford Motor Credit, 233 F.3d 417, 421 (6th Cir.2000); Hardy v. United States, 97
F.3d 1384, 1388 (1lth Cir. 1996))."
"The absence of an express right of action under section 524 if, in fact, no such right of action exists, does not mean that a violation of the discharge injunction cannot be remedied. Bankruptcy courts have regularly exercised their contempt power under 11 U.S.C. § 105 in order to remedy violations of the discharge injunction." In re Meyers, 344 B.R. at 64-65.(citations omitted).
A court may impose civil contempt sanctions where there is clear and convincing evidence that (1) a valid order of the court existed; (2) the defendant had knowledge of the order; and (3) the defendant disobeyed the order. See Robin v. Woods, 28 F.3d 396,399 (3d Cir.1994); In re Close, 2003 WL 22697825 at *10.
Earlier this year, a Judge of the United States Bankruptcy Court for the Eastern District of Pennsylvania awarded $198.00 in actual damages against a Credit Union and their attorneys when they pursued monetary damages in connection with an in rem mortgage foreclosure action against a discharged debtor. While that amount does not appear to be significant, it is worth mentioning that the Court awarded substantial attorney fees plus costs to the debtor’s attorney in connection with the award.
One of the best places to start before commencing any debt collection proceeding, including any telephone calls or correspondence, is the PACER website. PACER is an acronym for Public Access to Court Electronic Records. The PACER Case Locator is a national index for U.S. district, bankruptcy and appellate courts. The system serves as a search tool for PACER, and you may conduct nationwide searches to determine whether or not a party is involved in federal litigation. The site may be found at www.pacer.gov. For a mere $.08 per page of information retrieved, you can determine if a potential defendant has ever filed for bankruptcy and most importantly, whether that person has received a bankruptcy discharge. You can also enter the Court websites through PACER to obtain dockets and other information that will allow you to make an informed decision as to how to proceed.
Protect your client and yourself from claims that you have violated the bankruptcy discharge injunction by trying to impose personal liability for discharged debt. It is easy and inexpensive to prevent a costly misstep that can damage your relationship with a client and your professional reputation.