Violation of the Discharge Order: What you get

I post last Friday about how to pursue a violation of the discharge order from a bankruptcy. Once contempt has been proven to the court, the question turns to sanctions. This normally involves an award of monetary damages to the Debtor to be paid by the creditor. While it seems that this part is the simple, no-brainer part, it is actually where the most care should be taken.

We need to go back to prior to re-opening the bankruptcy case to be sure to cover this topic adequately. The court is going to look to see if the Debtors’ attorney went straight to litigation as opposed to attempting to mitigate damages. My practice on this may go overboard on mitigation, but I believe the principal is sound. I always provide my clients with a copy of the discharge order and instruct them: 1) if a creditor violates the order, send them a letter and attach a copy of the order making sure to keep a copy of the letter sent, and 2) if the creditor persists, they should contact me. Once they contact me, I will again communicate the order to the creditor with a “cease and desist” letter.

If the violation involved something more than directly contacting the Debtor, though, I may alter step two. For example, if the creditor has contacted neighbors or co-workers of the Debtor to attempt to collect the debt, then the cease and desist letter would also demand monetary compensation for the Debtor. If the creditor persists, then litigation is warranted.

Now, one reason to take the approach I outlined is that the scope of damages ranges from only actual damages all the way to punitive damages. If the violation is one where a mistake was made by the creditor and then timely rectified, the court is unlikely to award punitive damages. Furthermore, if they see no signs of mitigation attempts, the court may not even award all of the attorney fees. However, if the violation is egregious then the court may impose far larger monetary awards to the Debtor. So, my approach prevents needlessly mounting attorney fees while still getting the Debtors relief.

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.