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What Happens When a Creditor Ignores a Chapter 7 Bankruptcy Discharge Order?


Chapter 7 bankruptcy is designed to allow Iowa residents and businesses to discharge their outstanding debts. A discharge means the debtor is legally released from any further obligation to pay the debt. Just as important, the discharge also prevents a creditor from taking any further legal action to collect the debt. If the creditor subsequently ignores the discharge order and continues collection activity, the bankruptcy court may hold the creditor in civil contempt.

U.S. Supreme Court Clarifies Civil Contempt Rules

The United States Supreme Court recently clarified, however, that a creditor is only in civil contempt if “there is no fair ground of doubt” that the discharge order in question actually “barred the creditor’s conduct.”

Here is what led the Court to that decision. The petitioner in this case owned part of a company based in Oregon. The company sued the petitioner in Oregon state court, accusing him of breaching the business’ operating agreement. Before the case was heard, however, the petitioner decided to file for Chapter 7 bankruptcy, which stayed (delayed) the state litigation.

After a federal bankruptcy court issued a discharge order, the state court issued a judgment in favor of the company on its breach of contract claim. Of course, this judgment was now unenforceable due to the bankruptcy discharge. But the company still asked for–and received–a separate order awarding it attorney fees incurred after the petitioner filed for bankruptcy.

The petitioner then asked the bankruptcy court to hold the company in civil contempt. The company maintained its actions were justified under a known exception to the discharge rule. After extended litigation, a federal appeals court decided the company had a “good faith belief” the discharge order did not apply to its earlier request for attorney fees, and therefore it was not in civil contempt.

The Supreme Court agreed to the petitioner’s request to review the appeals court’s decision. In a unanimous ruling, the justices agreed the lower court applied the wrong legal standard. Justice Stephen Breyer, writing for the Court, explained that the “good faith” test would allow creditors to violate discharge orders even if their belief the order did not apply to them was “unreasonable.” At the same time, Breyer declined to adopt the “strict liability” standard supported by the petitioner.

Instead, the Court said that in bankruptcy cases going forward, a civil contempt finding is justified “when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.”

Speak with an Iowa Bankruptcy Lawyer Today

Even when a bankruptcy discharge order is clear, some creditors may still refuse to get the message. This is why it is important to work with an experienced Southeast Iowa Chapter 7 bankruptcy attorney when dealing with creditors. Contact the Noyes Law Office today if you are thinking about filing for bankruptcy and need legal advice on what steps to take next.




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