Banking Law

Bankruptcy Discharge Violations Are FDCPA Violations Too

By Wendell Sherk, Missouri Attorney

Debt buyers and debt collectors seem to prefer going to bankruptcy court instead of federal district court when they break the rules.  At least that seems to be the lesson from their litigation strategy.

If you filed bankruptcy, scheduled a debt, and received a discharge of it, you have a right to count on the debt going away.  Sometimes it doesn’t.  And usually that means the person or company trying to make you pay it is breaking the law.  But which law?

Clearly they are violating bankruptcy law.  If you are protected by a discharge order, the bankruptcy court can use its contempt powers to punish that creditor.  But what about the Fair Debt Collection Practices Act?  After all, in practice it ought to apply — if a debt collector tells you or implies to you that a discharged debt is still your lawful obligation, that’s misleading or false and it seems a clear violation to most of us.  (Although of course the collector may have some defenses.)

But courts are divided on whether both laws — bankruptcy and FDCPA — apply to this conduct.  The Ninth Circuit held in 2002 that bankruptcy law effectively controlled this issue (in effect “preempting” the FDCPA) and the consumer could not seek relief outside bankruptcy court.  On the other hand, the Seventh Circuit concluded two years later that the consumer had options to pursue some relief under both bankruptcy law and the FDCPA.

Most recently  on June 5th — and providing further support to a growing trend in the law — District Judge Garnett Eisele of the Eastern District of Arkansas agreed with the Seventh Circuit that the consumer can in fact enforce the FDCPA against such debt collection actions.  The decision came in Bagwell v. Portfolio Recovery Associates, LLC. (#08-CV-03229).

It is unfortunate that bankruptcy court — the court where consumers go to achieve a fresh start — seems to be seen as a relative safe haven for debt collectors who have violated a bankruptcy court’s discharge order.  But it is helpful for consumer rights to see more courts acknowledging that Congress provided other places and types of relief than just bankruptcy court so, eventually, it may actually force debt collectors to screen out discharged debt in a meaningful, consistent way.

Full post as published by Debt Law Network on June 15, 2009 (boomark / email).