07 March 2016

Bankruptcy Prophylaxis

Most folks have a general sense that, after going through the bankruptcy process, an individual's creditors may no long demand payment of a pre-bankruptcy debt. The source of this belief can be found in Bankruptcy Code § 524(a): "A discharge in a case under this title--(2) operates as an injunction against the commencement or continuation of an action ... or an act, to collect, recover or offset any such debt as a personal liability of the debtor."

The so-called discharge injunction is very broad and certainly extends to dunning phone calls and sending bills for unpaid pre-bankruptcy debts. Of course, some creditors don't much care and continue to send automatically generated billing statements notwithstanding the law. If that's the case, the penalty is contempt of court, and courts have been active in punishing creditors who do so.

But some creditors try to get a jump on the situation through clever drafting. Consider the fine print in the penultimate paragraph of the car loan bill sent to me by one of my students:

For what it's worth, I do not believe this will work. If a billing statement is a bill before bankruptcy, it's one afterwards as well. Thus, notwithstanding what Subaru's lawyers may hope, post-bankruptcy dunning violates the discharge injunction. What such language may accomplish, however, is to cause a discharged debtor to forego her right to have a court order a fine on account of such conduct. Gotta love those lawyers.

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