Chapter 7 bankruptcy debtor was entitled to damages from creditor

In addition to providing a fresh financial start, a Chapter 7 bankruptcy will also generally act as an injunction-a stop or prohibition-against actions to collect most debts, including harassment by bill collectors.

The United States Bankruptcy Appellate Panel case of In re Martin provides an example of what happens if a creditor does not comply with this injunctive effect.

The debtor buys a business

In 2006, the debtor bought a bar from the creditor. The debtor paid $30,000 as a down payment and agreed to make monthly payments on the balance.

Approximately two years later, the debtor was having financial problems and offered to give the bar back. However, the creditor did not want the business back and instead offered to lower the monthly payments.

Several months later, the debtor filed for Chapter 7 bankruptcy. The debtor again offered the business back and was refused. The debtor voluntarily made her monthly payments for the next 10 months, until the debtor received her Chapter 7 discharge in August 2009.

About one month after the discharge, the creditor sued the debtor for the outstanding balance of the debt, arguing that the debt was owed under an oral agreement, separate from the agreement discharged by the bankruptcy. The debtor brought a motion seeking to hold the creditor in contempt-seeking to punish the creditor for disobeying the bankruptcy discharge-and denied having entered such an oral agreement.

Holding the creditor in contempt

The Bankruptcy Appellate Panel explained that, under federal law, a bankruptcy order acts as an injunction against bringing an action against debts that were discharged, known as a "discharge injunction." Once a discharge is issued, protections are provided that prohibit a creditor from pursuing collection efforts. Although a debtor may make voluntary payments, doing so does not revive the debt.

The bankruptcy law also enjoins lawsuits, so a creditor who attempts to collect a discharged debt is violating not only the federal law but also is in contempt of the bankruptcy court that issued the order of discharge. A court may remedy this violation by awarding damages to the debtor.

Here, the debtor did not reaffirm the debt or enter into a binding post-discharge verbal agreement to continue making payments. The two parties also did not enter into a new post-discharge contract. The debtor and creditor did not execute any reaffirmation agreement nor did they file any related materials with the bankruptcy court.

Because the creditor was in contempt of the bankruptcy proceedings, the bankruptcy court awarded damages to the debtor of more than $4,000.

A fresh financial start

If you are seeking a fresh financial start and relief from collection efforts and other harassment, a Chapter 7 bankruptcy may be the answer. However, even if you do not qualify for Chapter 7 protection, whether due to your income or for other reasons, you may still qualify for other bankruptcy options that can provide relief. You should speak with an experienced bankruptcy attorney to explore the best option for your individual circumstances.