Interviewer: Why do creditors violate the law and charge people money after discharge?
Andrew Campbell: Well that is a great question and there are a number of reasons why this happens.
First most people don’t know this but on the date your file a bankruptcy petition there is an automatic order entered by the bankruptcy court.
This is known as the automatic stay. It is imposed by law on the date of the filing of the petition. It prohibits all attempts to collect a debt against the person that filed the petition.
So all action must stop. This includes any court actions, any collection action, even in most cases credit reporting.
It typically takes at least a couple of weeks for creditors to get notice.
If a creditor does violate the automatic stay and continue to call, send letters or file court documents it is typically because they either don’t have policies and procedures in place to prevent a violation of the law or haven’t followed them.
The most basic reason, though is simply not following or having in place good policies and procedures.
There might not be an evil malicious attempt to violate the law.
Debtors don’t have to prove ill will or an evil intent, though to get relief from a bankruptcy court.
Many creditors tend to confuse what the word “willful” actually means in terms of bankruptcy law.
The question is whether the creditor intended to commit the act that violated the bankruptcy code, not whether the creditor intended to violate the code.
It’s almost impossible to actually get into people’s head to figure out what they were thinking a particular point in time.
That is why actions always speak louder than words.
So for example, to determine willfulness a court might consider whether the creditor intended to send the letter attempting to collect a debt from the debtor after having actual or constructive knowledge of the filing of a bankruptcy petition.
Most of the time, bankruptcy judges want to make sure a lawyer is giving a creditor warnings about their acts. So if a creditor is violating the automatic stay.
Interviewer: Okay. It is possible that one way this happens is that the person doesn’t remember that they owe this company and they forget to put them on their bankruptcy petition?
Andrew Campbell: That could be one way.
If a person did not provide adequate notice of filing then that will prevent a bankruptcy court from taking any action against that creditor.
That doesn’t stop other types of actions that could be filed.
For example, a debt collector that sends a letter to a debtor after the date of filing violates the Fair Debt Collection Practices Act or FDCPA.
It doesn’t matter whether they knew of the filing or not. That’s because many parts of the FDCPA do not require any intent or knowledge.
All debt collectors have a responsibility to not send deceptive or misleading communications.
If they send a letter after filing they are saying that they have the legal right to attempt to collect a debt when in fact, they don’t.
This is why good debt collectors, those that play fair and keep it fair, has systems in place to scrub PACER, the court filing system, to determine is a person has filed bankruptcy before they send out letters.
A lot of people tend to feel bad for debt collectors because of this. They shouldn’t because the debt collectors that play by the rules and do it the right way ensure that consumers are treated properly.
If bad debt collectors are not punished properly then it encourages continued acts that violated the FDCPA. They make money by violating the FDCPA. That is not fair to the good debt collectors that try to follow the law.
It could also be where you have a situation where a lot of time debts are transferred. A collector takes on a debt – maybe they’re a debt buyer. They try to collect for six months, and then they sell the debt to another debt buyer.
The debtor comes in to an attorney, wants to file a chapter 7 or a chapter 13 bankruptcy, and all they have is a letter from six years ago.
A good bankruptcy attorney will have the credit reports pulled, but not every debt buyer will report every debt that they own that’s not getting paid.
Sometimes it’s a matter of not properly naming the debt collector that’s actually collecting because the debtor doesn’t have that information.
This can cause problems because either the original creditor or an earlier debt buyer in the chain of title gets the bankruptcy notice but thinks, originally , “Well, we sold this. This isn’t ours.” They throw it in the trash bin.
Maybe you send it also to a collector from three years ago. They get it and throw it in the trash bin.
If it is not forwarded on to debt buyers or collectors later in the chain of title, no one ends up getting notice. This is why it is vital for all debt collectors to be sure to have proper systems in place to avoid lawsuits.
Interviewer: Let’s say I’m a creditor and I sold the debt to some other place and I get a notice that one of my files filed bankruptcy. Am I under any obligation to let the new person that I sold the debt to know about this?
Andrew Campbell: Well, that comes down to contract law.
I don’t know what the contract for the sale of those debts stated about any warranties or representations.
Every single sale of these debts has certain warranties.
In other words, debt buyer A sells the debt to debt buyer B. It says something in there like, “If we find that a bankruptcy is filed on any of these debts we’ll buy it back. There’ll be a way for you to get a refund for the extent of that amount.”
Debt buyer B might be protected.
Any debt buyer should be thinking quite a bit about a debtor filing for bankruptcy. It is not unusual and certainly not unexpected. Most of these debt buyers consider it a cost of doing business.
Basically, here’s the rub. If you’re a debt collector and you get accounts, you should be doing bankruptcy scrubs on every single file at least once at the time you acquire the account.
If you are going to continue to collect for more than six months you should probably run the scrub again.
No one should feel sorry for these debt collectors because hardly any consumers actually know and understand their legal rights.
So it is rare that when a collector does violate the FDCPA that they actually get sued.
Interviewer: All right, so what will people experience once they file? Will they get calls from creditors or will they just get a letter?
Andrew Campbell: Occasionally they’ll get calls, but usually it’s letters because a lot of collectors just don’t do a lot of calls for one reason or another.
The general rule I apply is to allow a couple of weeks to pass to make sure a creditor gets notice.
Some creditors are set up to accept notice by email or by fax. These creditors get notice very quickly and tend to rarely have any issues.
If you get a letter and it’s been more than a month after you filed your chapter 7 or chapter 13, you should be telling your attorney because your attorney can take action.
If it is a debt collector then they can take action in the bankruptcy court.
You generally don’t bring an action in the bankruptcy court unless a creditor has had at least one or two warnings. Most will back off with a warning or two.
Interviewer: Okay, the bankruptcy court at that point is out of the equation?
Andrew Campbell: Yes. It’s very complicated but the jurisdiction of the bankruptcy court is limited.
It’s an extremely complicated issue. In fact it is so complicated that I heard in a speech by a bankruptcy judge that seventy percent of his time is spent determining whether his court has jurisdiction over a case.
Think about that – that only leaves thirty percent for him to actually do his job for everything else, so it’s really complicated.
Take this whole Anna Nicole Smith situation. Her death caused substantial changes to the law on bankruptcy jurisdiction.
Andrew Campbell: Yes. Remember there was 1.6 billion dollars at stake in that case.
Anna Nicole Smith had had a $850,000 judgment filed against her for sexual harassment in the 1990’s.
So in 1996 she filed for bankruptcy protection.
That caused a huge issue which resulted in a lot of litigation that ultimately ended up in front of the U.S. Supreme Court on more than one occasion.
It changed the rules regarding jurisdiction of the bankruptcy court and of the federal courts in general.