Volume 1, Number 4
Secured
Creditor’s Right to
Contact Debtor Subsequent
to Bankruptcy Discharge
When the Debtor Retains
the Collateral Without Redeeming
or Reaffirming
Written by Dennis
J. LeVine, Esq.
Dennis LeVine & Associates,
P.A.
Tampa, Florida
Debtors in bankruptcy often
retain secured collateral
(such as a home or car)
without redeeming the collateral
or reaffirming the secured
debt. In many instances,
the secured creditor will
allow the debtor to retain
possession of the collateral
and not foreclose or repossess
as long as the debtor makes
the monthly contract payments
and meets the other obligations
under the contract (e.g.
insurance coverage). As
such, a creditor’s
continuing contact with
the debtor may be necessary
to maintain the debtor-creditor
relationship with regard
to the surviving lien. The
issue is whether such contacts
are proper under the Bankruptcy
Code.
Many courts have found that
secured creditors may send
informational statements
to debtors after discharge.
See In re Ramirez,
273 B.R. 620 (Bankr. C.D.
Cal. 2002), aff’d,
280 B.R. 252 (C.D. Cal.
2002). Nevertheless, secured
creditors are apprehensive
about calling or otherwise
contacting the debtor after
the bankruptcy discharge
when the debtor fails to
make the contract payments.
This concern should diminish
in light of the case of
In re Garske, 287
B.R. 537 (9th Cir. BAP 2002),
where the Ninth Circuit
BAP upheld the bankruptcy
court’s decision that
a secured creditor’s
contacts with the debtor
subsequent to discharge
did not violate the discharge
injunction under Section
524(a)(2).1
In In re Garske,
the debtor filed chapter
7. Section 521 of the Bankruptcy
Code requires a debtor to
either (1) surrender the
collateral, (2) redeem the
collateral, or (3) reaffirm
the debt. Nevertheless,
some jurisdictions (like
California in this case)
allow the debtor to retain
the collateral and continue
making payments without
reaffirming. This is widely
known as the “ride
through” option. With
regard to her car loan with
Arcadia Financial, the debtor
selected the “ride
through” option.
After receiving her discharge, the debtor made monthly payments to Arcadia Financial, but consistently fell 2 to 3 months delinquent on her account. As a result, Arcadia Financial contacted the debtor via letters and phone calls to determine whether the debtor intended to retain the collateral, or intended to surrender the collateral. Since the debtor intended to keep the car and Arcadia Financial retained a lien, Arcadia Financial requested that the debtor voluntarily make the regular monthly contract payments on time in order to retain the collateral.
The debtor subsequently filed a class action lawsuit against Arcadia Financial, alleging their post-discharge telephone calls violated the discharge injunction under Section 524(a)(2). The bankruptcy court rejected the debtor’s argument, and found that Arcadia Financial “made no threats to debtor other than to assert its right to repossess the Vehicle if payments were not timely made. Further, [creditor] never threatened to sue debtor personally.” The bankruptcy court stated that only “improper collection activity” violated the discharge injunction, and ruled that the creditor’s phone calls to the debtor were not per se improper collection activity.
The Ninth Circuit BAP agreed with the bankruptcy court that the telephone calls were proper and did not violate the Section 524 discharge injunction, because Arcadia Financial was not attempting to collect on a discharged debt. The court found that “[s]o long as the creditor is not collecting the debt as a ‘personal liability of the debtor,’ there is no violation under 524(a)(2).” In re Garske, 287 B.R. at 545. The court found that a secured creditor has a continued interest in the collateral subsequent to the bankruptcy discharge because the secured creditor has the right to repossess the collateral if the debtor fails to make payments. Since the secured creditor had rights in the collateral, its actions were proper:
“Here, notwithstanding her statement of intention, Debtor chose to retain the Vehicle by continuing to make her payments under the Contract. She understood that in order to keep the Vehicle, she had to continue to make timely payments to Arcadia. No evidence was offered that Arcadia made any demands of Debtor for payment other than as a condition for her retaining possession of the Vehicle. In fact, Debtor admitted that Arcadia never threatened to sue her personally for the payments owing on the Vehicle.” 287 B.R. at 545.
While In re Garske is a Ninth Circuit case, other courts have been more restrictive in construing secured creditor contacts with debtors. See In re Draper, 237 B.R. 502 (Bankr. M.D. Fla. 1999)(J. Jennemann)(in a chapter 13 case, the court found informational statements sent to the debtor violated the automatic stay). Nevertheless, three Circuit Courts recently have ruled that creditors may contact debtors to discuss reaffirmation agreements, as long as the creditor refrains from coercion or harassment.2 In re Garske continues this view, and finds that some post-discharge contact with debtors by secured creditors is proper, although these post-discharge contacts should be limited in scope and not harass the debtor. As one court recently observed:
Undersecured creditors who make post-discharge contacts with debtors must navigate a very narrow path between legality and violation of the post-discharge injunction....The general rule provides that creditors with partially discharged claims may initiate minimal contact with the debtor to the extent necessary to service the surviving debt [citation omitted]. Normal and reasonable contacts such as mailing coupons or monthly statements to a discharged debtor in order to service the surviving secured debt do not violate the injunction. However, courts addressing this issue emphasize that any post-discharge contact by an undersecured creditor must be minimal, unobtrusive, polite and with no greater frequency than a debtor not in bankruptcy would reasonably expect. Any conduct or contact beyond this minimal standard constitutes a violation of the post-discharge injunction.” In re Bandy, 2003 WL 21781995 (Bankr. N.D. Iowa 2003).Since the content of a phone call can be critical, secured creditors should consider preparing a “script” of questions for analysts to use when calling debtors to inquire about their intentions. In all cases, secured creditors should fully and carefully document these accounts.
Finally, it is important to remember that the holding in In re Garske and similar cases is applicable only to secured creditors. Unsecured creditors should not contact debtors post-discharge under any circumstances, absent a valid reaffirmation agreement.
Dennis
LeVine is the principal
of Dennis LeVine & Associates
in Tampa, Florida. The firm
represents creditors in
bankruptcy and state court
matters throughout the State
of Florida. He can be contacted
at (813) 253-0777 or dennis@bcylaw.com.
A. Memo.ContactDebtor.Ridethrough.option
FOOTNOTES
1 Section 524(a)(2), also referred to as the “discharge injunction,” states in pertinent part:
“A
discharge ... operates as
an injunction against the
commencement or continuation
of an action, the employment
of process, or an act, to
collect, recover or offset
any
such debt as a personal
liability of the debtor,
whether or not discharge
of such debt
is waived ....”
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2
Cox v. Zale Del., Inc.,
239 F.3d 910, 912 (7th Cir.
2001); Pertuso v. Ford
Motor Credit Co., 233
F.3d 417, 423 (6th Cir.
2000); In re Jamo,
283 F.3d 392 (1st Cir. 2002).
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