EVEN after debtor obtains a bankruptcy discharge of his debts, he might feel morally obligated to pay a debt for some reason. For example, debtor borrowed $20,000 from his “rich uncle.” This debt was discharged in bankruptcy therefore no longer legally collectible. However, debtor decides to start paying his uncle $200 a month despite the fact that debtor obtained a discharge last month. After making 6 payments or a total of $1,200, debtor stops paying. Uncle then sues debtor for the unpaid balance of $18,800 plus interest claiming that debtor he voluntarily waived the discharge by continuing payments after discharge. Debtor alleges that he did not reaffirm the debt and did not waive discharge by making payments. Who is correct?
Under the new bankruptcy code, only debts which are reaffirmed survive the discharge. Reaffirmed debts are legally valid and collectible debts even if there is a bankruptcy discharge. Reaffirmation is a contract that says you understand that the debt will survive the discharge, that you will continue payments after discharge, and the judge has approved the reaffirmation agreement. So, if you reaffirm you car loan, if you default a year from now and the car is repossessed, you will still owe the repossession deficiency. After the car is sold at auction, depending on the net sales proceeds, make and model of the car, you will still owe $5,000 to $15,000 because you reaffirmed the debt.
In Re Hopkins, debtor wife went to work in 2007 for Mr. Harding, who was an attorney and a doctor of osteopathy (physician). Late in 2007 debtor contemplated filing for bankruptcy relief. Harding provided her with financial assistance by borrowing $30,000 from bank and giving her the money. Debtor agreed to repay the loan. One year later, debtor again considered bankruptcy relief. This time debtor filed Chapter 7 and scheduled Harding as a creditor owed $15,000. The debt was not reaffirmed. Although she said she always intended to pay the debt, and felt a moral obligation to do so, Harding relied on a 1970 state court decision in Iowa for the position that the debtor’s continued payments were sufficient to establish that the debt had been reaffirmed. In 2010, two months after she received her discharge, she left her job with Harding for a new job with better benefits and where the grass was greener because it was synthetic. She made payments to the bank on Harding’s loan under December 2011. She then informed Harding that she could not afford to continue payments. Harding then sued her for damages based on detrimental reliance, unjust enrichment and entitlement, fraud, negligent infliction of emotional distress. Debtor’s bankruptcy lawyer filed a motion to dismiss based on the bankruptcy discharge. The state court denied the motion. Ten days later, debtor asked the bankruptcy court to reopen her case so that she could seek sanctions. After the case was reopened, the bankruptcy court found that Harding willfully violated the discharge injunction. The court questioned how Harding, “a very intelligent and seasoned attorney with an IQ surpassing Einstein’s,” could consider it appropriate to rely on a state court case that predated the new bankruptcy code. “Additionally, it has not escaped this court’s attention that Harding omitted any mention of this bankruptcy case in the petition and in the amended and substituted petition. The court is willing to conclude that was done intentionally to avoid an early dismissal of the action upon the filing of a motion to dismiss. Harding wanted an opportunity to depose debtor and to subpoena records related to her debts and gambling activities. Harding is indeed a very intelligent and seasoned attorney,” the court said. “Hence, the record contains clear and convincing evidence that Harding was aware of the general discharge order and that he willfully violated the discharge injunction by commencing and continuing his lawsuit in state court.” The court ordered him to pay actual damages of $1,500, attorney fees of $1,775 to the debtor’s original bankruptcy counsel who represented debtor in the state court action, and $9,000 to their current counsel. Harding was also ordered to pay $10,000 in punitive damages. Thus, continued payments after discharge without reaffirmation will not waive discharge. These payments are legally considered gifts from debtor to creditor.
“The Lord is my strength and my shield; my heart trusts in him, and I am helped. My heart leaps for joy and I will give thanks to him in song.” – Psalm 28:7.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Mailstop 58 Bldg A-1 Suite 1125 Alhambra, CA 91803.
