Kentucky Bankruptcy Law

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Violation of the Discharge Order: What to do

When a bankruptcy results in a discharge of debt, whether it be a Chapter 7, 12, 13 or otherwise, creditors are precluded from taking action to collect on that debt down the road. In Kentucky and many other jurisdictions, there is no private right of action (no right to file a separate lawsuit) for the violation of a discharge order, so the matter has to be taken up as a contempt action within the bankruptcy. The first step is for the bankruptcy to be re-opened. Once reopened, the Debtor can file their motion to impose contempt sanctions against the creditor.

The bankruptcy court must make a determination if contempt of the order occurred and the first step in that is finding that the actions of the creditor were “willful”.  A willful action, in this context, does not mean that the creditor deliberately decided to go against the court’s order. Rather, willful means that the creditor intended to do the thing that was the violation even if they did not intend the result. So, if the creditor files a lawsuit seeking to collect on the discharged debt personally from the Debtor, this is intentional; they did not accidentally file a lawsuit. They intended to file the lawsuit and intended to name the debtor personally even if they did so without any awareness that they were violating the order. In other words, the “Oops, my bad” defense would not suffice.

Along with this willful element, there must be evidence that the creditor actually knew about the discharge order. This comes down to showing that the creditor was served with notice of the discharge occurring. Just because they failed to communicate this knowledge to their attorney would not get them off of the hook. However, this has to be shown by a heightened standard of “clear and convincing” evidence. So, evidence that the Debtor verbally told the creditor that the debt was discharged is likely not good enough. One would want a paper trail on this element.

If the action that was a violation was intended and the creditor had actual knowledge of the discharge then the court can find that contempt occurred. Once a finding of contempt is made, the court then decides what sanctions are to be imposed.  Sanctions typically involve awarding monetary damages. Monetary damages can include attorney fees, but check back for my next post on this issue.

November 16, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Civil Procedure, Discharge, Violation | , , , , , , , , , | 1 Comment