Second Attempt To Collect Debt Proves Costly For Creditor

When a debtor has successfully gone through bankruptcy and received a discharge, a discharge injunction arises that prevents any future collection efforts on any debt that has just been discharged. If any creditor attempts to collect on any debt that was discharged, the debtor may sue that creditor. Such was the case in the recent decision of McLean v. Greenpoint Credit LLC.

The Facts

In 2006, the debtors filed a Chapter 13 petition that was ultimately converted to Chapter 7. The debtors were discharged under Chapter 7 early in 2009; all creditors received a notice of discharge.

The debtors filed a second Chapter 13 bankruptcy in 2012. A creditor which held an unsecured loan for about $11,000 for a mobile home sales contract filed a claim in the second bankruptcy trying to recover payment for that $11,000 debt. The debtors objected to the creditor’s attempt and filed a claim seeking both actual and punitive damages resulting from the creditor’s actions.

Creditor’s Defense

The creditor defended, saying that filing a claim was not the same as an “act to collect” that would violated the terms of the discharge injunction. The discharge injunction, issued after the end of a bankruptcy case, permanently prevents any act, involving a legal proceeding or not, to receive payment from the debtor for a debt discharge in bankruptcy.

The creditor’s assertion that filing a claim is not the same as an act to collect under the Fair Debt Collection Practices Act was dismissed by the court in that the authorities relied upon by the creditor had been recently overturned.

The creditor blamed software changes for the filing, claiming that the filing was not willful. However, “subjective intent” does not mean that the filing was not “willful” in the legal sense. The filing was willful if the creditor knew of the discharge injunction and if the creditor intended to perform the actions that violated the injunction. Courts have regularly found that mistakes and computer problems do not negate a finding of willfulness. Therefore, the creditor’s behavior was willful.

$25,000 Emotional Damages

This is a first for the Eleventh Circuit: an award for emotional damages due to a willful violation of the discharge injunction.

An award for emotional damages is not dependent upon any other award of damages, and is appropriate where significant harm is established, as well as a cause-in-fact between that harm and the violation of the discharge injunction. The emotional distress must be substantial-trivial nervousness is insufficient. Evidence is not limited to expert medical testimony, but can also be extended to non-expert evidence showing outrageous conduct by the creditor and/or the debtor’s stress reactions as noted by a spouse and family.

The McLean debtors were able to demonstrate increased stress levels, resulting in increased use of medication for existing stress-related disorders. The causal connection was established in that the wrongful claim resulted in an almost doubling of the estimated Chapter 13 monthly payment plan.

$50,000 Punitive Sanction

The Bankruptcy Code allows bankruptcy courts to punish parties’ bad behavior so that they will not act that way again. Whether seen as a way to encourage the creditor to change its computers so that this problem will never happen again, or to punish the creditor for its violation of the discharge injunction, the $50,000 sanction was proper to encourage compliance with court orders.

Bankruptcy And You

If you find yourself in financial trouble, you should consult an attorney experienced in all areas of bankruptcy and consumer law to discuss all options which may be suitable to you.