Post-Bankruptcy Protections for Discharged Debtors Remain Strong By: Christian Strahl

Post-Bankruptcy Protections for Discharged Debtors Remain Strong 

By: Christian Strahl

            One of the more unique aspects of the American legal system is our Bankruptcy Code. A person, municipality, or business entity can petition for bankruptcy and receive a discharge of all remaining obligations at the conclusion of their bankruptcy case if they filed in good faith and complied with all other requirements.[1] This discharge is a special point of salvation for those who get so far into debt that there is no other way to become solvent; it promotes economic utility and protects consumers from permanent indebtedness. However, beyond simply discharging all remaining debts at the end of the case, there are two significant protections offered by the Bankruptcy Code. The first occurs at the beginning of the case. This is the Automatic Stay, which kicks in as soon as the bankruptcy petition is filed and prevents all collection efforts and any creditor action that would improve their position or otherwise coerce payment.[2] The second, occurs after the case is finished, when the formal discharge from bankruptcy is granted. This discharge releases the debtor from any unpaid obligations, and includes an injunction that protects the now ex-debtor from any creditor that tries to collect on a debt discharged through bankruptcy.[3] These protections are some of the most important rights of debtors, especially less sophisticated debtors. This article examines a recent case from the Bankruptcy Court for the District of Maryland that sharpened the metaphorical teeth on the protections consumers gain when granted a discharge through the bankruptcy system.

The case this article uses to demonstrate the power of consumer protections provided by the discharge is In re Alder.[4] In this case, Alder, and four other people executed a lease guaranty in support of a lease agreement between two business entities in 2008.[5] Roughly two years later, Alder filed for Chapter Seven bankruptcy relief on August 10, 2010.[6] Alder scheduled the Hannons, a married couple who were also part of the group that executed the lease guaranty, as creditors in his bankruptcy case for a potential obligation rising from an unrelated state court case.[7] Alder was granted a discharge of debts and obligations through his Chapter Seven bankruptcy case a few months after his petition was filed.[8] All creditors, including the Hannons, received notice of this discharge.[9]

However, almost five years later, the Hannons filed a civil action against Alder seeking contribution based on the lease guaranty they were all party to.[10] Alder’s attorney contacted the Hannon’s attorney, and threatened to seek sanctions if the case was not dismissed because Alder had received a discharge from the bankruptcy court.[11] The Hannons refused, maintaining that their claim had arisen after the discharge, and the discharge only satisfied pre-existing obligations as opposed to obligations arising post-discharge.[12] Shortening the facts slightly for brevity, Alder moved for sanctions on the grounds that the Hannons were in violation of the discharge injunction, and the Hannons refused to budge from their belief that they had not violated the discharge injunction; the Bankruptcy Court for the District of Maryland found that the Hannons were willfully violating the discharge injunction, and imposed sanctions on them.

The interesting point in this case is that in order for the sanctions the court imposed to be proper, there is a two part test that includes a willfulness requirement.[13] Does it seem proper, that if the Hannons did not believe they were in violation of the discharge injunction, that their violation could have been willful? The court found that the standard for willfulness is not necessarily an intentional violation, but intentional actions that violate the discharge injunction with knowledge that the discharge was granted.[14]

The Hannons maintained that the claim arose after the discharge, and thus had not been discharged through the bankruptcy case.[15] However, the court found that the “execution of the guaranty created a prepetition contingent claim in favor of the Hannons.”[16] This claim, being prepetition, was discharged through the bankruptcy case even though it had been contingent.

This demonstrates the high level of protection that the American bankruptcy system offers to debtors. Once a discharge is received, anyone that was listed as a creditor in the original petition (and any amended petition, as may apply) is notified. This means that if any of those creditors take any intentional action that violates the discharge, even if they believe that action is not a violation, then they have willfully violated the discharge injunction and opened themselves up to potential sanctions. Considering that these sanctions can include actual damages, attorney’s fees, and potentially punitive damages, this is a serious level of protection.[17]

More than anything, In re Alder seems to be an affirmation that the Bankruptcy Code balances debtor and creditor interests, but also affords the debtors it serves many rights and protections not available anywhere else in American jurisprudence. These rights and protections, rather than facing erosion, seem to be standing strong with cases like this safeguarding the rights of the financially downtrodden.

[1] 11 U.S.C.A. § 727(a), (b).

[2] 11 U.S.C.A. § 362(a)(1)-(8).

[3] 11 U.S.C.A. § 524(a)(2)-(3).

[4] In re Alder, No. 10-28229, 2016 WL 5947220 (Bankr. D. Md. Oct. 13, 2016).

[5] Id. at *1

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id. at *3.

[14] Id.

[15] Id. at *1.

[16] Id. at *3.

[17] Id.

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