VALIDATION OF DEBT LETTERS SENT AFTER BANKRUPTCY DISCHARGE

Once a discharge order is entered in a debtor’s bankruptcy, creditors are prohibited from pursuing further collection efforts. Collection efforts such as phone calls, letters and lawsuits attempting to collect a discharged debt are in contempt of the discharge order. They violate the discharge order. The discharge order annuls the legal liability of debtor for the debt previously owed. Debtor does not owe the debt anymore. Therefore, a creditor’s conduct of continuing collection efforts against debtor after the discharge order has been entered is not only a futile attempt to collect a debt that no longer legally exists, but also a violation of bankruptcy law. For instance, Mr. A sold his restaurant to Mr. B for $100,000. Mr. B paid $50,000 and still owes $50,000 which he promised to pay in 6 months from the profits of the restaurant. However, the restaurant never turned a profit, and the $50,000 was not paid. Mr. A sues Mr. B for breach of contract for $50,000 and demands the return of the restaurant. Mr. B then files for Chapter 7 bankruptcy and walks away from the restaurant. After the discharge order is entered, Mr. A obtains a judgment in the lawsuit and garnishes Mr. B’s wages. Obtaining the judgment and garnishment of wages after the discharge is a violation of the discharge order. The judgment and the garnishment order are null and void. But what if Mr. A did not continue the lawsuit and did not garnish Mr. B’s wages, but instead, wrote Mr. B a letter asking him to pay $50,000 as soon as possible?

 In Re Collins, the debtors received a Chapter 7 discharge in July 2008. They surrendered their home during the bankruptcy. A foreclosure judgment was entered in the lender’s favor in October 2008. The redemption period on the property ended in January 2009. In October 2010, the defendant Marix Servicing LLC acquired the servicing rights for the mortgage. Marix received notice of the debtors’ bankruptcy discharge at the same time. Following the assignment, Marix sent a series of letters to the debtors regarding the mortgage. The first letter, entitled “Validation of Debt,” informed the debtors of the transfer of the loan, the amounts due under the note, and pertinent information for making future mortgage payments. Subsequent letters provided additional information about the assignment, alternatives to foreclosure, and property insurance. Every letter but one included a generic disclaimer stating that it was not an attempt to collect debts from customers in pending bankruptcy cases, or those who had already obtained a discharge under the Code. The debtors had their bankruptcy case reopened, and asked the bankruptcy court to impose sanctions for violations of the discharge injunction. Marix did not dispute that it intentionally sent the letters to the debtors after they received their discharge, or that it had notice of the discharge.

The only issues were whether the letters were attempts to collect the discharged debt, and, if so, whether they were sufficiently coercive or harassing, to constitute a violation of the discharge injunction. Marix argued that the letters were intended to do nothing more than provide information to the debtors (boy scouts’ honor), an intention made clear by the disclaimer. However, the bankruptcy court found no reason for Marix to provide information to the debtors, who were no longer personally obligated on the note and held no interest in the house. “Marix can point to no language in the Code that permits a party that has no contractual or IN REM relationship to a discharged debtor to send letters asserting such a relationship. Furthermore, while the presence of disclaimer language has operated to mitigate a finding of harassment or coercion in previous cases, it does not do so here. Marix had no reason whatsoever to send these letters to the Collins. In light of the Collins’ discharge, and the actual notice Marix admits of having of it, purposeless letters relating to past debts and obligations constitute harassment proscribed by the discharge injunction,” the court said.

 Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.