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Fair Debt Collection: 13.4.1 Claims Arising During a Bankruptcy Case

Debt collection claims may arise after a bankruptcy case is filed, but before a discharge is entered in the case. In chapter 7 cases that time period is about four months and in chapter 13 cases it can be three to five years. For example, a creditor that initiates a lawsuit over a prepetition debt after the debtor has filed for bankruptcy, but before discharge, potentially violates both the automatic stay and the FDCPA.

Fair Debt Collection: 13.4.2 Claims Arising After a Bankruptcy Case

Debt collection abuse claims that arise after entry of a discharge order in either a chapter 7 or chapter 13 case are not property of the bankruptcy estate.264 A bankruptcy discharge order bars collection of discharged debts as personal liabilities of the debtor. Despite the occasional suggestion of creditors to the contrary, the discharge order does not have any broad claim preclusion effect on all potential disputes between the debtor and a creditor.

Fair Debt Collection: 13.1.1 Effect of Bankruptcy on Debt Collection Claims

Claims against debt collectors and consumer bankruptcy filings often go hand-in-hand. Consumers who have filed or are considering filing for bankruptcy have frequently suffered from abusive debt collection practices. Virtually all bankruptcy debtors have received dunning letters and phone calls from debt collection agencies and collection lawyers, and many of these communications violate the Fair Debt Collection Practices Act and state debt collection laws.

Fair Debt Collection: 13.1.2 Organization of This Chapter

An understanding of the interrelation of a consumer bankruptcy and debt collection claims requires an understanding of certain key bankruptcy features, including the automatic stay, the property of the estate, exemptions, and the bankruptcy discharge.

Fair Debt Collection: 13.2.1 Chapter 7 Overview

A bankruptcy case filed under chapter 7 is often called a “liquidation.” In a chapter 7 case, the debtor’s assets are examined by a court-appointed trustee to determine if anything is available to be sold or recovered for the benefit of creditors. Certain property cannot be liquidated by the trustee because it is exempt.4 In most consumer cases, virtually all of the debtor’s assets are exempt.

Fair Debt Collection: 13.2.2 Chapter 13 Overview

A case filed under chapter 13 is often called a “reorganization” because it provides for the “adjustment of debts.” Unlike chapter 7, chapter 13 gives debtors the opportunity to adjust their financial affairs without having to liquidate their non-exempt assets.14 In a chapter 13 case, the debtor submits a plan to repay creditors all or part of the money owed to them over a three to five year period.15 If the proposed plan meets the requirements set out in the Bankruptcy Code, it must be confirmed by

Fair Debt Collection: 13.2.3 Choosing to File and Choosing a Chapter

Before a bankruptcy case can be filed, it is necessary that a decision be made that bankruptcy is, in fact, the best vehicle for dealing with the problems facing a particular client. Most of the legal analysis that occurs in a typical consumer bankruptcy case involves comparing bankruptcy with other possible avenues of relief.

Fair Debt Collection: 13.2.4 The Automatic Stay

The automatic stay is a fundamental cornerstone of the bankruptcy system.36 In most cases,37 it is triggered instantly upon the filing of a bankruptcy petition.38 The main purpose of the automatic stay is to protect the debtor39 and the debtor’s property and to allow the bankruptcy court to deal with the debtor’s situation in an orderly manner.

Fair Debt Collection: 13.2.5 Property of the Estate and Exemptions

The concepts of property of the estate and exemptions are keys to deciding whether to file a bankruptcy and under which chapter to file. They are also important for understanding how a debtor’s federal and state debt collection claims will be treated with respect to bankruptcy.75

Fair Debt Collection: 13.2.6 Discharge

The ultimate goal of most consumer bankruptcies is the discharge, which frees the debtor from personal liability on almost all debts.88 It is this clean slate that normally gives debtors the fresh start that bankruptcy is meant to provide. However, under limited circumstances the court may deny a discharge, or the discharge may be inapplicable to some debts.

Fair Debt Collection: 13.3.2.1 Generally

A consumer’s failure to disclose a legal claim in bankruptcy schedules can create a significant problem in later litigation. When a prebankruptcy asset is unscheduled, it is never administered, exempted, or abandoned. Instead, it remains property of the bankruptcy estate.

Home Foreclosures: 17.5.3.3.4 Was the transfer involuntary?

The debtor may use the trustee’s avoidance powers only when the transfer to be avoided was “involuntary.” Neither the term “voluntary” nor “involuntary” is defined in the Bankruptcy Code. Involuntary transfers, however, generally refer to transfers effectuated by operation of law, such as an execution of judgment, repossession, foreclosure, or garnishment. A transfer may also be considered “involuntary” if it resulted from fraud, material misrepresentation, or coercion.

Home Foreclosures: 17.6 Getting Relief Outside Litigation

In addition to—or instead of—litigation, there are other ways to get relief for victims of foreclosure rescue scams. The most direct is to demand relief. When facing a scam that involves transferring title to the consumer’s home, the most immediate relief would be destroying an unrecorded deed or executing and recording a reconveyance of the title, as well as cancelling any associated transactions. Victims of phantom assistance scams should demand their money back.

Home Foreclosures: 17.4.2.2.4 Example of rescinding a foreclosure rescue scam

Moore v. Cycon Enterprises, Inc.,268 provides an example of how the tender amount can be calculated in a foreclosure rescue scam case. There, the court found that the sale of the home was really an equitable mortgage and allowed rescission because the rescuer had not provided the required disclosures to the homeowners.

Home Foreclosures: 17.4.2.2.3 The consumer’s tender obligation

It is important to remember that a homeowner who seeks rescission must be prepared to pay back their gains from the transaction. This is called the consumer’s “tender” obligation and arises if the creditor paid off the original mortgage or brought it current, or provided the homeowner with cash. But the consumer should be able to credit any payments made to the rescuer—whether in the form of rent payments, finance charges, closing costs, or other disguised fees or payments—because rescission voids the original obligation to pay those costs.

Collection Actions: 2.5 The Bankruptcy Alternative

With certain exceptions—notably, most student loans—a chapter 7 bankruptcy filing wipes out unsecured debts and eliminates the need to defend the collection action. Nevertheless, non-exempt assets will be lost in a chapter 7 bankruptcy, the bankruptcy will not discharge debts incurred after the bankruptcy is filed, and, because of the cost involved, bankruptcy may not make sense to discharge small debts.

Collection Actions: 2.6 Pro Se Representation

Attorneys who decide not to represent the consumer can still give the consumer information on pro se representation. The attorney can explain the importance of not missing court dates and of responding to requests for admission in a timely fashion.

A strict warning can be given about the dangers of communications with the debt collector’s attorney. The collector’s attorney is representing the interests of the collector—no matter how helpful the attorney seems. Statements by the attorney should not be seen as being in the consumer’s best interest.

Collection Actions: 2.8.1 Tactical Considerations

Consumer attorneys utilize different tactics in collection defense cases, depending on their jurisdiction, the applicable court, and the attorney’s own preferences. One approach is to litigate the case aggressively from the start, sending extensive discovery to the debt collector, filing motions, and raising counterclaims. This approach will often lead to the collector voluntarily dismissing the case, leaving the case in limbo, or at some point bringing a summary judgment motion, seeking to dispose of the case without a trial.

Collection Actions: 2.8.2 First Litigation Steps

In certain states, one preliminary issue is whether to keep the case in the small claims court where the action is filed or seek a transfer to another trial court that may have stricter procedures. If the attorney is only advising a consumer who is going to appear in court pro se, then the small claims court may be the better option. The same may be the case when the attorney files an appearance but wishes to do so with the minimum time investment.

Collection Actions: 2.8.3 The Consumer’s Discovery

Discovery in a collection case has a tactical component. Refraining from taking discovery at all may be appropriate when the collector assumes the case will result in a default judgment or a simple trial and therefore may not be prepared at trial with sufficient evidence to meet its burden of proof. Discovery may in fact force the collector to pull together its evidence and be more prepared for trial, when it otherwise would not be.

Collection Actions: 2.8.4 The Debt Collector’s Summary Judgment Motion

In an attempt to avoid a time-consuming trial, collectors may resort to a summary judgment motion. The motion may be based on statements deemed admitted by the consumer because the consumer failed to timely respond to a request for admissions, or the motion can be based on an affidavit from an employee of the collector and various “business records” attached to the motion.