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Supreme Court Sets Civil Contempt Standard for Creditors in Bankruptcy CasesA recent U.S. Supreme Court ruling established that creditors can be held in civil contempt for violating a bankruptcy discharge order unless there is “fair ground of doubt” as to the violation. A chapter 7 bankruptcy discharge will clear a debtor from having to repay most of their debts incurred before filing for bankruptcy. A discharge does not apply to certain debts, such as student loans or debts incurred due to fraud. Otherwise, a creditor is not allowed to ask a debtor to repay debts from before the discharge order and could be punished for knowingly violating the order. While not a landmark Supreme Court decision, lower courts will likely cite the ruling during disputes between debtors and creditors after a bankruptcy discharge.

Case Details

Taggart v. Lorenzen is an Oregon case involving a business investor who had received a bankruptcy discharge to protect him from repaying his creditors. Litigation continued over the ownership of the debtor’s business interests, and the court ordered the debtor to pay the creditors’ legal fees at the end of the case. The debtor filed for an order of contempt, claiming that the creditors violated the discharge order by trying to collect legal fees. This case became a larger argument about what constitutes a creditor being in civil contempt of a discharge order:

  • The bankruptcy court found the creditors in contempt based on a strict liability standard, which holds that creditors cannot take action after a discharge order without court approval; but
  • An appellate court overturned that ruling and used a subjective standard that creditors are not in contempt as long as they have a good-faith belief that their actions do not violate the discharge order, even if that belief is unreasonable.

The Supreme Court vacated the appellate court ruling, rejecting both sides’ arguments in favor of what it believes to be a more reasonable objective standard. Creditors must have an objective reason to believe that they are allowed to take collection action against a debtor after a discharge order, but requiring creditors to clear all actions with a court is unreasonable.

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Requirements for Creating a Reaffirmation AgreementAfter bankruptcy filers discharge their debts, unsecured creditors may lose the ability to seek or enforce repayment. The debtor can voluntarily repay the creditor in order to keep a property but has no contractual obligation to make continued payments. In some cases, the debtor may choose to reaffirm the debt. The debtor signs a new agreement that requires him or her to repay the debt. As an incentive, the creditor may offer to refinance the debt into terms that are more manageable for the debtor. However, courts will not enforce a reaffirmation agreement unless you met the legal requirements in creating it. You could instead be liable for damages to the debtor if the court rules that the agreement violated the bankruptcy discharge injunction.

Deadline

You must meet two deadlines in order to file a reaffirmation agreement with a debtor:

  • The agreement must be filed no later than 60 days after the first meeting of creditors unless the bankruptcy court gives you an extension; and
  • The agreement must be filed before the debts are discharged as part of a bankruptcy.

The deadlines mean that you must discuss and complete the reaffirmation agreement while the bankruptcy case is ongoing. Once a debt has been discharged, you cannot create a new agreement that requires payment of the same debt from the same party. Even if the debtor agrees to reaffirm the debt, a court will likely rule that the contract is unenforceable. However, a third party who was not involved in the bankruptcy could agree to take on the debt.

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