A fundamental goal of bankruptcy law is to give individuals a fresh start from burdensome debts. Bankruptcy laws do this by granting individuals a “bankruptcy discharge,” which cancels out all personal liability for most debts. The bankruptcy discharge bans creditors from taking any further action against the individual to collect on pre-bankruptcy debts and provides for significant penalties against creditors who try to collect despite the discharge prohibition.
In most individual Chapter 7 cases, the individual usually receives a discharge a few months after he or she files for bankruptcy. The discharge is a court order that permanently prohibits a creditor from trying to collect on any debts that were listed in the individual’s bankruptcy schedules. This means that the creditor cannot take any action to collect on the debt, including contacting the individual in any way or filing any legal action for repayment.
Treatment of Secured Claims and Liens
If a creditor has a valid lien on specific property belonging to the individual, a bankruptcy discharge does not prevent a creditor from enforcing the lien and seeking to recover the property secured by the claim or lien. (This requires that the creditor file a separate legal action, called an adversary proceeding.) However, a creditor can only seek to enforce a claim or lien up to the value of the property that secures the lien. If the property is worth less than the amount of the claim or lien, the creditor is only entitled to the sale price of the property. The creditor cannot attempt to collect the lien balance from the individual who has received the bankruptcy discharge.
If there is more than one creditor holding a secured claim or lien, the claim or lien that was filed first generally has priority, which means that creditor collects its money first. If there is money left after the first creditor collects, then the second creditor may collect, and so on. However, creditors can only collect up to the value of the property. Again, if the value of the multiple claims or liens is greater than the value of the property, the creditors can only collect up to the value of the property itself, and they cannot seek to obtain the balance from the individual.
Florida Debtor Granted
The recent Middle District of Florida case of In re Plummer, the debtors (a husband and wife) filed for Chapter 7 relief. Several years before they filed for bankruptcy, the debtors purchased a residential rental property that was financed by a loan from the creditor. The loan was secured by a mortgage on the property.
When the debtors filed for bankruptcy, they declared in their statement of intentions that they intended to surrender the property back to the creditor. Neither the debtors nor the creditor took any further action regarding the property and the debtors received their Chapter 7 discharge.
After the bankruptcy discharge was entered, the creditor presented a warranty deed to the debtors, demanding that they sign over the property and agree to pay any balance between the sale price of the property and the original pre-bankruptcy mortgage. In essence, the creditor demanded that the debtors reaffirm their full pre-bankruptcy monetary obligation to the creditor.
The debtors refused to sign the warranty deed and creditor went forward with foreclosing on the property. The creditor also obtained a state court judgment for attorney fees and costs related to the foreclosure.
The debtors complained to the bankruptcy court that the creditor violated their discharge relief by continuing to hound them for the balance of the mortgage and for the foreclosure costs. Agreeing with the debtors, the bankruptcy court (1) voided the state court award of attorney fees and (2) found the creditor and his foreclosure attorney in contempt of the bankruptcy court’s discharge order. As punishment, the bankruptcy court ordered that the creditor and his attorney be liable for all of the debtors’ costs related to the discharge violation. The bankruptcy court also ordered the creditor and his attorney pay the debtors $20,000 in punitive damages for willfully violating the debtors’ Chapter 7 discharge.
People file bankruptcy because they can no longer manage their debts and they are looking for the legal help that is offered by the US Bankruptcy laws. The “fresh start” given by the bankruptcy law cannot be violated by creditors. If you or someone you know needs a fresh financial start, please contact the Law Offices of Kelley & Fulton, P.A. at 561-491-1200.