Discrimination After The Discharge

In a few cases, events that require action occur after the debtor has received his discharge

It is flatly illegal for the government to

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discriminate against a debtor because that debtor went through bankruptcy.

Pablo was a licensed general contractor who built office buildings. After his accountant embezzled $400,000 from his company, Pablo was forced to file Chapter 7. About a month after Pablo received his discharge, the State Contractors License Board wrote to Pablo and told him that it intended to revoke his contractor's license because of the bankruptcy. Pablo had his attorney write back, explaining that it is generally illegal to discriminate against a debtor because of a bankruptcy and specifically illegal to revoke, suspend, or refuse to renew a license or permit because of a bankruptcy. The matter was dropped shortly thereafter.

Again, the point of bankruptcy is to get a fresh start, and it would be very hard to do so if a government entity was able to hold the case against a debtor. It is illegal for the Department of Motor Vehicles to withhold a driver's license because of a debt that was discharged in bankruptcy (e.g., one created by a traffic accident). Similarly, parking tickets that are dischargeable in bankruptcy cannot form the basis for a denial of a driver's license. However, if the license is being withheld for reasons unrelated to debt-a bad driving record, for example-then there is nothing discriminatory about withholding a license.

The protection from government discrimination based upon bankruptcy is fairly broad. Federally guaranteed student loans or grants cannot be denied because of a bankruptcy filing. A transcript from a college cannot be withheld. It is illegal to deny someone accommodations in public housing or to otherwise deny government benefits or services (such as Social Security or welfare) because of a bankruptcy. Again, this protection is for discrimination based upon the filing of a bankruptcy or the discharge of a related debt; it offers no protection for denial of benefits premised upon other, unrelated, reasons.

Protection from discrimination also extends to private employers. It is illegal for an employer to discriminate against a person because that person filed bankruptcy. You cannot be fired if the reason for the firing is your bankruptcy. This is especially helpful where a Chapter 13 payment is automatically deducted from a debtor's paycheck (as sometimes happens), and the employer is unhappy about it.

A debtor who feels she has been illegally discriminated against because of a bankruptcy will need to bring a motion for sanctions against the transgressor in bankruptcy court.

Attempts to Collect Discharged Debts

Some times a creditor attempts to collect on a debt that was discharged. Creditors have absolutely no right to attempt to collect a discharged debt.

If one does, the first thing you can do is write a letter to the creditor explaining that his debt was discharged. Attach a copy of your discharge (always keep the original in your files), and tell him to stop it, or else. It is the "or else" that powers your letter. A discharge is a federal court order. In it, all creditors are specifically told to cease all further collection activities. Violating this order constitutes contempt of court and is illegal. Explain that to your creditor, and you should be left alone.

If you are not, you will need to go to court. A small claims action could result in a money judgment for a clear violation of the order. A smarter bet would be to file your action in your local bankruptcy court, since that is the court that issued the discharge order. Go to the clerk's office and ask about the proper procedure for bringing your complaint.

Remember this, though: debts not listed are debts not discharged. You must list the debt and the creditor in order to receive a discharge as to that debt. If you forgot to list a creditor whose debt would have been discharged had he been listed, see below.

As for debts that were not discharged-things like most taxes and student loans, child support and alimony, government fines, and so on-those creditors do have a right to get paid back once the case is concluded. There is nothing illegal about the IRS's garnishing your wages to get back taxes repaid, once your case is over.

Finally, what about secured debts that were neither reaffirmed, redeemed, nor surrendered?

Kathleen had listed a debt for a stove from Appliance Warehouse that she had bought three years before she filed bankruptcy. Although Appliance Warehouse had written to her during her case, requesting a reaffirmation, she never signed it and never gave the stove back. In fact, even though she stopped paying the debt, she never heard from Appliance Warehouse again.

Creditors with a legitimate security agreement retain their interest in the property after the bankruptcy is over. The difference is that before the bankruptcy, the creditor had a security interest and you were personally liable for the debt. After the bankruptcy, although the creditor retains the security interest, your personal liability is discharged.

In Kathleen's case, her liability to Appliance Warehouse was wiped out with her discharge. Appliance Warehouse's only recourse after bankruptcy is to retake its three-year-old stove. How much will that cost Appliance Warehouse? More than the stove is worth? Probably. And what would they do with it? It is simply not cost-effective in many cases for a secured creditor to retake secured merchandise, depending, of course, upon the value of the merchandise.

And think about this: What if Appliance Warehouse does send two guys out to get the stove, but Kathleen refuses to let them into her house? In that case, Appliance Warehouse must hire a local attorney to go to state court and get an order allowing the store to come get its property. Now, how much will that cost? Ten times the value of the stove? That is why Kathleen never heard from Appliance Warehouse again.

Realize that the results would be different if it was a car that Kathleen decided to keep. In that case, the car would be rightfully repossessed soon after the discharge.

Debts You Forgot to List

Sometimes people forget to list a creditor on their schedules. Such debts are not discharged. If the mistake is discovered before the case is over, you can simply amend your schedules, pay a nominal fee to the bankruptcy clerk, file the amendment, and get the debt discharged.

If you discover the problem after you receive your discharge, then it is a bit more problematic. In that case, you will likely have to reopen your case and amend your schedules to get the debt discharged. This will require hiring an attorney and having a motion filed with the court.

Opening the case again will work only if your case was a no-asset case, that is, one in which everything you owned was fully exempt and there were no assets to distribute to your creditors. Most consumer Chapter 7 cases are no-asset cases. If yours was an asset case, it is unlikely that you will be allowed to reopen it. That is because the omitted creditor did not get to share in the proceeds from your assets, and the assets are already distributed. If that happened, you would still owe the creditor its money, as the debt would not have been discharged in your case.

One other option, instead of the costly and burdensome reopening the case choice, would be to write your creditor a letter. The Ninth Circuit Court of Appeals, for example, has stated that there is simply no need to reopen a case if the debt would have been discharged if it had been listed in the original filing. In the Ninth Circuit, the debt is treated as if it were discharged. In your letter, explain this to your creditor. In all likelihood, he will never know if you are in the Third District or the Eighth District or the Ninth District. And anyway, bluffing is not illegal.

Property You Did Not List

If you forgot to list some property, and realized it after your case was discharged, you have an obligation to tell your trustee about it. You still might be allowed to keep it.

If the property would have been exempt had you listed it, the trustee will take no action and you can keep the property. Also, if the property is of no real value, the trustee will not take the time to reopen your case, take the property, sell it, and distribute the income to your creditors. Now, if you forgot to list that plot of land you own along the Carolina coast, you can rest assured that you will not own it for long.

In related matters, you have an obligation to tell the trustee about certain property you acquire within 180 days after you file. Those items are:

  1. Inheritances. Whether by will or in a trust, any money you inherit within 180 days of filing becomes part of your bankruptcy estate.
  2. Death benefits. This would include not only money received from life insurance, but proceeds from a death benefit plan as well.
  3. Divorce settlements. Money or property received as a result of a divorce decree or a marital settlement agreement are part of your estate if received within 180 days of filing.

To the extent that any of these things are non-exempt, you may lose them to the trustee if he finds them to be of substance. This means that even if you filed your case on January 1, received your discharge on April 1, and inherited $10,000 on May 1, you would have to tell the trustee about the money.

The Important Legal Concept to Remember:

Most people forget about their bankruptcy as soon as the discharge arrives. Normally, it is only when a creditor continues to pursue you, or you receive a substantial sum of money, that action after discharge is needed.

Getting Credit Again

Staying Out of Debt

Excerpted with permission from Ask a Lawyer: Debt and Bankruptcy. Copyright ? 1998 Steven D. Strauss. All rights reserved.
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