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Interesting Bankruptcy Case Heads to the Supreme Court


The United States Supreme Court does not hear very many bankruptcy cases. However, a new case is slated for oral argument on April 24th and deals with an interesting aspect of the law. In particular, the court will need to consider what happens when a debt is discharged but a creditor nevertheless tries to collect on the debt, believing erroneously that they can bring a lawsuit. The case should be of interest to many of our clients who receive a discharge only to have a creditor try to collect on the debt.

Current Law: Contempt Citation

The bankruptcy code intends for discharges to have teeth, and the code states that a discharge is to be treated as an injunction against lawsuits to collect on the debt. Any creditor who ignores is violating a court order, essentially, and could be hit with a citation for contempt. As a result, the creditor could be forced to pay a considerable fine for violating the discharge and also reimburse the debtor for defending against the suit.

Contempt makes sense in this situation. If there wasn’t any punishment, then creditors would ignore the discharge and continue to try and collect on debts that have been wiped out by the bankruptcy. Some debtors might not eve know what their rights are and begin making payments on debts which they clearly have no continuing legal obligation to pay.

The Issue in this Case

The case before the Supreme Court, Taggert v. Lorenzen, has an interesting wrinkle. The creditor’s believed in good faith that they could bring a lawsuit against the debtor because a state court told them they could.

The dispute arose between small business owners. One of them, Taggert, had been sued for trying to sell his interest in the small business, but the lawsuit was stayed after he filed for bankruptcy. When he received his discharge, he asked the trial court to dismiss him from the lawsuit involving the business. The court declined. After the lawsuit ended, the other business owners requested attorneys’ fees from Taggert.

The Supreme Court must decide whether a creditor’s good faith belief that the lawsuit is warranted shields them from a contempt citation. In other words, must they actually know that they can’t sue on a discharged debt before a bankruptcy court can find them in contempt?

Legal experts are undecided on how the Supreme Court will decide the issue. The federal government filed a legal brief in the case but did not support either party—an unusual stance. We will be watching this case closely, and the Court should announce its decision later this spring.

Securing Your Fresh Financial Start

If you are struggling with debt collectors contacting you about debts, you should consider a consumer bankruptcy. Chapter 7 is a quick and painless way of eliminating most debts, and it only takes a few months to complete. Alternately, a Chapter 13 or Chapter 11 might be better for you.

To speak with an experienced Plantation Chapter 7 bankruptcy attorney, contact Nowack & Olson today. We have provided services to the South Florida community for several decades, and we are anxious to help you as well.

Please call 888-813-4737 to schedule a free consultation.



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