Bankruptcy: Post-Discharge Injunction - New Note with Credit Union

     The United States Bankruptcy Court, Western District of Virginia, Harrisonburg, ruled in the case of Mickens v. Waynesboro Dupont Employees Credit Union, Inc. that a credit union that facilitated a discharged debtor’s cosigning of a new promissory note that covered the credit union debt that previously was discharged was liable for a violation of the bankruptcy law’s post-discharge injunction statute, and the debtor had no liability for the note and was entitled to damages and attorney’s fees.

     The Court decided that the issue was whether the fact that the credit union obtained a new note signed by the debtor for his discharged obligation constituted an “act to collect, recover or offset” the discharged debt in violation of the post-discharge injunction under Bankruptcy Code §524 (a)(2).
     The Court in Mickens decided that the credit union’s act, permitting the debtor to cosign the new note, expressly placed the debtor in the same state of personal liability for the exact debt which was discharged. The notice to the cosigner stated this fact. Bankruptcy Code § 524 (c) lays out detailed requirements which must be met for a debtor to reaffirm a pre-petition debt and thereby remain obligated to pay such a debt in spite of the discharge injunction. The Court ruled that the credit union’s actions would be subject to Bankruptcy Code §524 (c). Therefore, they must fall within the definition of “an act” for the purposes of the discharge injunction, however narrowly that phrase may be defined.
     The Court ruled that while no cases with identical facts were readily apparent at the time it ruled, it concluded that the cases which most closely resembled the fact pattern for this case were those which involved “ clumsy attempts to avoid the injunction.” In these cases the creditors’ attempt to circumvent the requirements in the Bankruptcy Code §524 (c) and (d) through a reliance on the voluntary repayment provision in Bankruptcy Code §524 (f).
     The Court in Mickens ruled that the credit union could not make any serious argument that its actions or new note even attempted to comply with the requirements of Bankruptcy Code §524 (c) and (d). There could be no doubt the credit union was aware of the injunction and intentionally permitted and facilitated the debtor’s signing a new note which returned him to his pre-petition position of personal liability for the pre-petition debt. Such action constituted a willful violation of the post-discharge injunction of Bankruptcy Code §524 (a)(2).
     The Court ruled that the credit union was in violation of Bankruptcy Code §524 (a)(2) and the liability of debtor on the note he cosigned with a friend was void ab initio. The credit union also was liable for damages and attorney’s fees.

Bankruptcy: The Automatic Stay

     Federal Bankruptcy law provides for an automatic stay (injunction) to take effect immediately upon filing for bankruptcy. The stay prevents creditors from taking any further action against debtors without court approval. The stay can stop a foreclosure or vehicle auction, even if notice of the filing is given moments before the sale is to occur. The automatic stay, unless lifted by the Bankruptcy Judge, or in some cases the trustee, remains in effect until it is terminated at the time of discharge, at which time it is replaced by a permanent injunction.
     Violation of the automatic stay is a serious offense. A willful violation can result in a finding of contempt of court. Sanctions for violating the stay can be awarded as well. These sanctions can include a fine and/or an assessment of attorney’s fees. A finding of contempt of court is also punishable by a jail sentence. Attorney consultation is always recommended when action against bankrupt debtors is contemplated.
     The automatic stay may be lifted upon proper motion and argument by creditor's counsel. Reasons for making such a motion include, among others, lack of insurance on the property, or other similar reasons resulting in the creditor being unprotected while its rights are being determined.

Bankruptcy: Post Discharge Mortgage Statement Held Not to Be a Violation

     The U.S. District Court in Charlottesville, in the case of Pearson v. Bank of America affirmed a bankruptcy court decision which held that the bank did not violate the discharge injunction against creditor action under bankruptcy code section 524(a) by sending monthly statements.
     In Pearson, although the debtor had obtained a Chapter 7 discharge for her debt with the bank, she continued to receive a routine monthly statement from her Bank of America mortgage that provided principal balances, estimated payments, payment instructions and information on how payments would be posted.
     The language in the opening section of the Mortgage Statement clearly stated that the debtor’s loans had been discharged, that such discharge insulated debtor from any efforts by anyone to collect this discharged debt as a personal liability, and that the debtor could not be pressured to pay this debt. The Mortgage Statement’s opening section referenced the fact that some homeowners become concerned after receiving statements and therefore assured the debtor that such letters were sent as a courtesy, and were not a demand for payment.
     The statements also provided that no monthly statements would be sent in the future if the debtor would simply make one toll-free telephone call to an identified number.
     Considering all of the facts, the court held that the statements did not represent a violation of the discharge injunction.