Bankruptcy

Bankruptcy judge strikes back against zombie debt

By Cathy Moran, California Bankruptcy Lawyer

The sale of debt discharged in bankruptcy to a collector  violates  the bankruptcy discharge. The decision in Laboy v. FirstBank Puerto Rico held the seller liable for attempts by its unrelated buyer some 15 years after the bankruptcy to collect a  discharged account.

What happened to Mr. Laboy is all too familiar:  some 16 years after he got his discharge,  he got calls and letters trying to collect a debt included in his long closed bankruptcy case.  The discharged account  had  returned from the dead as zombie debt.

The calls came not from the original creditor but from a debt buyer who acquired Mr. Laboy’s account 13 years after the filing of his  case.  The debt buyer apparently knew nothing about the bankruptcy case, since the bank sold the account without telling the buyer it was unenforceable.

The court was asked to decide whether the bank who knew of the bankruptcy was liable for violating the discharge injunction even though it had no further communication with Mr. Laboy since the 1993 bankruptcy.   Judge Lamoutte held that the very act of selling the account to someone who was expected to attempt collection was a violation.

This decision highlights one of the functional failures of the bankruptcy discharge to bring real peace to a debtor.  Even though unenforceable, the  discharged accounts  get passed from collector to collector, for decades, with each collector attempting to squeeze money from the hapless debtor.

The Laboy decision held that the selling creditor was legally responsible for the acts of the buyer when it knew the buyer intended to attempt collection.  Kudos to Judge Lamoutte who refused to absolve the original creditor from the foreseeable consequences of the sale of its claim against Mr. Laboy.

Until there are more such decisions, however, the profit in selling discharged debt will likely offset the occasional penalty for indifference as to the debtor’s right to be free of the debt.  Debtors need to tell their bankruptcy lawyers, or a new bankruptcy lawyer, when this happens and lawyers need to bring the pattern to judges who can do something about it.

Full post as published by Bankruptcy Law Network on April 04, 2010 (boomark / email).