Another Arrow in the Quiver: Preserving the Fresh Start in Debt Collection by Creating a National Registry for Discharge Orders

JurisdictionUnited States,Federal
Publication year2016
CitationVol. 33 No. 1

Another Arrow in the Quiver: Preserving the Fresh Start in Debt Collection by Creating a National Registry for Discharge Orders

Joseph W. Sherman



The debtor's fresh start is violated when a creditor attempts to collect on a discharged debt as a personal liability of the debtor. Even if that attempt is unintentional—i.e., not willful—the fresh start has been hampered. Under the Fair Debt Collection Practices Act, debt collectors are not expected to have the same knowledge about a debt as the original creditor. Thus, a debt collector may unintentionally violate a discharge injunction by sending a collection letter or making a collection phone call. The Bankruptcy Code cannot remedy this scenario because violations of the injunction require a contempt analysis, which requires a willful violation to award damages. Likewise, the FDCPA recognizes the knowledge disparity between creditors and debt collectors, and allows debt collectors to make an initial contact without violating its prohibition on unfair, deceptive, or abusive practices.

Debtors have a number of tools at their disposal to remedy abusive practices, none of which touches on this exact scenario. This Comment argues that debtors are unable to fully remedy the violation of their discharge injunctions through existing law, and that amending the Code is not the solution. Rather, the problem of discharge injunction violations should be viewed primarily as a product of the debt collection industry. Thus, this Comment suggests creating a national registry to house discharge orders, requiring debt collectors to search the registry prior to making a first collection attempt, and proposes that the Consumer Financial Protection Bureau is better suited to implementing the registry than bankruptcy courts.

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In the gray area that is the intersection of the American bankruptcy scheme and the debt collection system, debt collection practices may violate the debtor's fresh start. Under the Bankruptcy Code (the "Code"), people who file for bankruptcy and fulfill the relevant requirements are granted a discharge order. This order does not "wipe out" the debtor's debts, but simply cuts off the debtor's personal liability for those debts that are discharged in the bankruptcy case. This distinction is important because it means that discharged debts still exist outside of bankruptcy: they can be sold to debt buyers,1 and debtors may voluntarily repay them.2

With over 77 million Americans having a debt in collection,3 the potential for abuses by debt collectors exists. Consumers now fear "zombie debts": debts they thought they no longer owed but which are given new life by collection efforts.4 Zombie debt affects many consumers, not just those who have gone through bankruptcy.5 For example, in July 2015, JPMorgan Chase was found to have sold zombie debts to third-party debt buyers in the form of "accounts that were inaccurate, settled, discharged in bankruptcy, not owed, or otherwise not collectible."6 For the debts discharged in bankruptcy, any attempts to collect by the third-party debt buyers would have violated those debtors' discharge injunctions and, thus, their fresh start.

This Comment suggests that one way to prevent this type of discharge injunction violation is to create a national registry to house discharge injunctions and require debt collectors, including third-party debt buyers, to confirm the status of a debt prior to attempting to collect on it. The registry should be implemented by the Consumer Financial Protection Bureau

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("Bureau") under the Fair Debt Collection Practices Act ("FDCPA"), rather than under the Code. The Bureau's mission and rulemaking authority put it in an excellent position to combat this type of zombie debt collection.

I. Background: Preserving the Discharge Injunction Is Key to Advancing the Fresh Start

The fresh start is the sine qua non of the American system of bankruptcy,7 and its development underscores its important place. Bankruptcy law has historically been a creditor's remedy.8 The fresh start, a relatively recent concept, had its birth in the American system in 1867.9 When the Bankruptcy Act of 1867 was passed, it reflected "a compromise between debtor and creditor interests."10 This compromise was largely propelled "by a desire to 'relieve the plight of debtors.'"11 This first attempt at legislating a fresh start policy goal in bankruptcy did not last long, however—the 1867 Act was repealed in 1878.12 The next time that Congress created a federal bankruptcy system was in 1898, when it created a system very similar to the one currently in place.13 The 1898 Act created a more debtor-friendly system which gave debtors a discharge.14 Much like in the 1867 Act, the discharge created by the 1898 Act was justified by the social welfare, or social utility, argument.15

The social utility argument has two parts. First, the public interest is benefited when a debtor is liberated from oppressive levels of debt and permitted to return to being a productive member of society.16 Second, society's forgiveness of debts of the honest but unfortunate debtor is an act of

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humanity to those in need.17 It is within this first line of reasoning that the concept of the honest but unfortunate debtor arises.18 The legislative history related to the passage of the 1898 Act shows that this view had the support of some members of congress. One House Report sympathetically characterized the honest but unfortunate debtors as persons who have tried to make it but, through no fault of their own, have met with misfortune:

[t]his vast number constitutes an army of men crippled financially-most of them active, aggressive, honest men who have met with misfortune in the struggle of life, and who, if relieved from the burden of debt, would reenter the struggle with fresh hope and vigor and become active and useful members of society.19

The fresh start remains a "principal goal" of our bankruptcy system.20 In fact, Congress proclaimed "its intent to preserve the 'fresh start for the honest debtor'" when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act.21 In contrast to the longevity of the fresh start principle, the humanitarian justification does not seem to have done as well. Shortly after its enactment, the 1898 Act was criticized for being a "poor-debtor law."22 Today, we might consider that the humanitarian argument has been supplanted by scientific studies of the physical, emotional, and psychological effects of bankruptcy on a debtor. Such studies examine these effects of bankruptcy as a way of measuring the success of bankruptcy in rehabilitating debtors.23

Rehabilitation is the notion that bankruptcy law can help put the debtor back on his or her feet and is an important part of helping a debtor make the

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most of the fresh start.24 The goals of rehabilitation include "consumer financial education of the debtor, emotional and psychological relief from financial failure, and renewed debtor participation in the open-credit economy."25

Today, the fresh start, with all of its notions of social utility and rehabilitation, is protected by the discharge order, and is offended when a creditor or a debt collector attempts to collect on a debt that has been discharged in bankruptcy. The power of the discharge order to protect the debtor's fresh start is found in § 524(a), which voids any judgment attempting to determine the personal liability of the debtor26 and enjoins any attempt to collect on a discharged debt as a personal liability of the debtor.27 Technically speaking, the discharge order does not wipe out debt; it only creates a permanent injunction against debt collection.28 Thus, § 524(a)(2) is more of a defensive weapon than an offensive weapon; it is more reactive than proactive.

The limits of the discharge injunction can be seen with a comparison of the FDCPA and the Code. Under the FDCPA, the debt collector29 may send a letter to the debtor alleging that the debt is owed and notifying the debtor of the debtor's right to request verification.30 When the debtor, or the debtor's attorney, informs the debt collector that the debt has been discharged, the collection attempts are required to cease.31 Although the debt collector's initial contact letter is permitted under the FDCPA, the letter violates the debtor's fresh start because it is an act "to collect" a discharged debt from the debtor

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personally.32 The bankruptcy court will provide little relief because the discharge injunction, although violated by the collection letter, has not been violated willfully. Requisite knowledge is necessary for the court to award damages for a willful violation,33 but here the debt collector had no knowledge that the debt had been discharged.

Although a technical violation of the discharge injunction has occurred, proof of money damages is missing. The debtor's fresh start has been violated, however, by the collection attempt. This Comment seeks to reduce or eliminate discharge violations by debt collectors, while also dealing fairly with debt collectors who commonly lack knowledge about the debtor's discharged status.

Debt collectors may violate the injunction intentionally or unintentionally. Many of the violations are likely unintentional, a result brought about by creditors who sell debt portfolios with incomplete information on accounts. A debt collector may have many accounts that have been discharged in bankruptcy, but the account portfolio only mentions that the debt is delinquent, not that the debtor has filed for bankruptcy relief. it would not be fair to punish the debt collector for having no knowledge of the debt's discharged status. Debt collectors need a reliable source of information regarding discharged debts. One way to establish...

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