Creditors Must Be Prudent Handling Discharged Mortgage Debt Obligations

An emerging trend in Bankruptcy law is that debtors’ attorneys are filing class actions against mortgage servicers for violating the discharge injunction codified at § 524 of the Bankruptcy Code.

In recent filings, debtors’ attorneys have alleged that:

  • The failure to update a credit report to show that a debt has been discharged is a violation of the discharge injunction if shown to be an attempt to collect the debt.  Because debtors may feel compelled to pay debts listed in credit reports when entering into large transactions, the creditor, by leaving discharged debts on a credit report is attempting to collect the debt.[1]
  • Lenders who send monthly mortgage statements to debtors who received a discharge are violating the discharge injunction by attempting to collect monthly payments on discharged debt.[2]

Creditors have been attacking class action complaints on jurisdictional grounds.  However, some bankruptcy courts have ruled that, at a minimum, the Bankruptcy Court has jurisdiction over a class of debtors in its district.  One court has noted that “class actions promote efficiency and economy in litigation and permit multiple parties to litigate claims that otherwise might be uneconomical to pursue individually,” and that such “principles are no less compelling in the bankruptcy context.[3]

In a recent case filed in the Southern District of New York, the Bankruptcy Court denied a mortgage creditor’s motion to dismiss on jurisdictional grounds.  The court sustained a nationwide class action complaint, noting that “the bankruptcy discharge order is a form, a national form, which is issued in every case where there is, in fact, a discharge… it is an action to protect a statutory right prohibiting the collection of in personam claims against the members of the debtor class that arose pre-bankruptcy.”  The crux of this recent decision is that bankruptcy courts may become more likely to sustain class action complaints.  Creditors must be prudent in handling discharged debts nationwide, or they may risk facing a nationwide class action which could lead to substantial damages.

Bankruptcy Courts may use their contempt power under § 105 of the Bankruptcy Code in awarding damages for a creditor’s violation of the discharge injunction.  A court may award actual damages, attorney’s fees, punitive damages and potentially damages for emotional distress.  Awards for damages can be substantial.  A creditor may also violate the Fair Debt Collection Practices Act and other state and federal consumer protection laws in attempting to collect a discharged debt.

Creditors are advised to review the procedures with which they manage accounts which may have been discharged in bankruptcy.  The creditors’ rights attorneys at Luper Neidenthal & Logan can answer any questions you may have regarding compliance with the discharge injunction.

[1] See Rusty Haynes v. Chase Bank USA N.A., Adv. Pro. No. 13-08370, Doc. # 63 (Bankr. S.D. NY 2013).

[2] See Teague N. Webb v. M&T Bank Corporation, Adv. Pro. No. 14-02198, Doc. # 1 (Bankr. S.D. Ohio 2014).

[3] Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn), 609 F.3d 748 (5th Cir. 2010).

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