Discharged Creditor Responsible for Selling Debt

Discharged Creditor Responsible for Selling Debt

A bankruptcy discharge is a permanent court injunction prohibiting creditors from enforcing certain obligations against the debtor. While the bankruptcy discharge does not actually “erase” a debt, it prohibits any collection against the debtor personally. In plain terms, the debt is no longer legally enforceable against the debtor and the creditor can no longer engage in any type of collection activity such as; letters, phone calls, threats of criminal proceedings or other adverse actions brought about with the purpose of debt repayment.

The purpose of the discharge injunction is to provide the debtor with a fresh financial start, free of the pressures of former debt. Violation of the bankruptcy discharge is a serious matter. A willful violation of the discharge injunction constitutes contempt of court. The violator (often called the “contemnor”) may be penalized for this conduct, including a hefty fine and payment of attorney fees.

Recently United States Bankruptcy Court Judge Enrique S. Lamoutte discussed the liability of a creditor that sold a discharged debt and the subsequent purchaser attempted collection action. This is practice is often referred to as “zombie” debt collection. The debt is legally “dead,” and the collector attempts to “bring it back to life” through direct collection efforts.

In the case of Laboy v. FirstBank Puerto Rico, Judge Lomoutte reminds creditors that they "are obligated to maintain procedures to ensure that they do not violate [the discharge injunction], and may be held liable for damages and attorney's fees if they do not.” He concluded that FirstBank had knowledge of the bankruptcy filing and discharge and that its actions in selling the debt to a debt collector some 15 years after the bankruptcy discharge violated the discharge injunction.

If you receive contact from a debt collector concerning a discharged debt, notify your bankruptcy attorney immediately. This may be an innocent error, or it may be a zombie debt collector on the prowl. Either way, you should contact your bankruptcy attorney and chase these zombies debts back to the grave!

Auto Redemption in Chapter 7 Bankruptcy

Auto Redemption in Chapter 7 Bankruptcy

During a Chapter 7 bankruptcy all unsecured debts are discharged. Debts that are secured by collateral (e.g. car loans) must be paid or the collateral must be returned to the lender. Occasionally an individual considering Chapter 7 bankruptcy will own a vehicle that is worth less than what is owed. This situation is often referred to as “upside down” and usually involves a late model vehicle that has depreciated faster than the person has paid on the loan. It doesn’t make any sense to pay for something that is “upside down,” but often an individual needs to keep the vehicle for transportation to work and for family use.

Fortunately, a provision of the Chapter 7 bankruptcy code allows an individual to keep a vehicle and pay only its current market value. This process is called “redemption.” During a redemption the value of the vehicle is determined (either by agreement between the debtor and creditor or by the bankruptcy judge after a hearing) and a court order is issued directing the creditor to accept a sum from the debtor in exchange for a release of its lien. In plain terms the lender is paid a lump sum and the lien on the vehicle is released. For example, a debtor that owes $15,000 on an auto that is worth $10,000 will only pay $10,000.

Unfortunately, the payment must be made in a one-time lump sum to the lender at the time of the redemption order. If the debtor is unable to pay for the vehicle, there are finance companies that make redemption loans for debtors in bankruptcy. Before making a redemption loan these finance companies require a loan application and certain assurances of repayment. The interest rate can be high for a redemption loan, however the resulting monthly payment is often lower than the original payment. It is important to carefully consider all of the advantages and disadvantages before making a decision to redeem a vehicle:

Advantages of a redemption loan:
• Retention of the vehicle;
• Vehicle is no longer “upside down;”
• The creditor cannot repossess the vehicle;
• Usually results in a lower monthly payment.

Disadvantages of a redemption loan:
• High interest rate.

Redemption is not the only option for keeping a vehicle after a bankruptcy. A skilled bankruptcy attorney can explain all of your options and help you obtain the best deal for your family.