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The Discharge in Bankruptcy
Recently, I have had a number potential clients call to ask me whether it is legal for a creditor to exercise a lien after a discharge in bankruptcy. The gut response to anything related to the idea of whether a creditor can take something from you after discharge is a resounding, “NO WAY!” However, the reality is a bit more nuanced than that and actually needs more facts to answer the question and to determine what rights the debtor may have.
First and foremost it is important to understand the discharge in bankruptcy. The simple fact is the discharge acts as a permanent injunction on collection of debts. A creditor whose debts were discharged has no right to collect on their debts. The creditor cannot file suit against you, continue a law suit, or enforce a preexisting judgment. They may not call or write you to demand payment of the debt. They may not acquire a new lien on your property. Quite simply, the debt no longer exists.
Violations of the discharge can have dire consequences for the creditor. Those consequences can include sanctions from the bankruptcy court, a judgment in favor of the debtor under the Massachusetts Consumer Protection Act (it is an unfair and/or deceptive business practice to attempt to collect a non-existent debt), and/or under the Federal Fair Debt Collection Practices Act.
So it is quite clear that if you owe money to Credit Card Issuer X, file bankruptcy, list Credit Card Issuer X as a creditor and receive a discharge, then Credit Card Issuer X cannot file suit, attach your bank account or otherwise attempt to collect on the debt that you discharged in Bankruptcy.
But what about Creditor Y who sued you before you filed for bankruptcy, received a judgment and, in conjunction with the judgment received a judicial lien on your personal property, bank account or home? Can Creditor Y exercise its rights under the lien? The answer to that question is a bit murkier. In bankruptcy a simple discharge does not, in and of itself, remove a lien that was valid at the time of the bankruptcy petition. Accordingly, a homeowner can file for bankruptcy and in no way disrupt the property rights of the mortgage holder. A mortgage holder whose debt is not paid per the original contract cannot sue the debtor post discharge to recover a deficiency, but can take the property back with a foreclosure if the debtor fails to make payments.
The story does not end there, however. With some pro-activity, the asset which is subject to a judicial lien may be protected from the creditor in bankruptcy, at least to the extent that the asset can be exempted. The bankruptcy code allows a debtor to strip a judicially acquired lien from personal or real property (or a bank account) “to the extent that the lien impairs an exemption” in the property. Whenever I represent a client I look at all liens on personal property (including bank accounts) and real property, to determine which liens can be removed, and we plan our case accordingly. As the object of the bankruptcy case is to allow the debtor a “fresh financial start” it follows that a debtor should be able to protect those assets that are exempt from a creditor who has taken a non-consensual lien. In some instances other liens, including both non-consensual and even consensual liens (such as mortgages) can be removed due to the value of the property or if they were acquired particularly soon before the bankruptcy filing. (But beware, in certain instances the removal of a lien can only be done by a Trustee and will benefit only the bankruptcy estate.)
The key to the avoidance of a lien, or to having an enforceable discharge is notice. The 5th amendment of the United States Constitution requires that due process be afforded to prior to depriving someone of “life, liberty or property.” A discharge deprives a creditor of a property right – the right to collect a debt. Accordingly, the debtor must be given an opportunity to participate in the bankruptcy. Case law has interpreted this to mean that even in the case of a no-asset Chapter 7 bankruptcy case, if the debt was not listed and the creditor was not given notice of the bankruptcy, then the debt is not discharged.
So what happens where a debt was omitted, and the creditor tries to sue you or get a lien on your house? If the case is still open, an amendment to the schedules is possible. The newly added creditor will be afforded the same amount of time to object to the discharge and exemptions as other creditors had, but in most cases the discharge will eventually apply to the added creditor as well. If the case is closed, there is an additional layer of complexity in that the case must be reopened, which involves an extra motion with a significant fee to the court and a requirement of serving certain creditors. In those cases, even where some time has passed since the case was closed, while there are costs involved, the situation is not beyond repair.
If you are facing liens on your property or significant debts of any kind, it is important that you speak to an experienced bankruptcy attorney immediately. To schedule a free consultation call the Law Offices of James Wingfield at 508-797-0200 or visit the contact page of our website today.
