Just before Laertes went off to Paris in Hamlet, his father (Polonius) gave him a slew of fatherly advice. One suggestion was “Neither a borrower nor a lender be.”
But most of us have ignored that advice. We are both borrowers and lenders. So, it’s very important for us to understand how bankruptcy affects both groups. Many of our previous posts focus on the rights of debtors in bankruptcy. That makes sense, because we are a debt-relief law firm. But we also need to examine creditors rights in bankruptcy. Believe it or not, moneylenders are people too.
The State of The Law
Many Europeans originally came to Minnesota and other areas of the West and Midwest to escape their creditors. So, many states in this region have very strong anti-creditor laws. These statutes sharply limit the powers of private debt collectors. Public debt collectors, like the Minnesota Department of Revenue and IRS, are largely exempt from these rules.
These debtor-friendly laws may not last too much longer, at least in their current forms. In 2017, the Supreme Court significantly watered down the protections contained in the Fair Debt Collections Practices Act. Midland Funding v. Johnson essentially expanded the statute of limitations in debt collection matters. By a 7-1 vote (incoming Justice Neil Gorsuch did not participate in the case), the Justices ruled that a debt buyer could always file a proof of claim in a consumer bankruptcy case. That right remains even if the collection statute of limitations had long since expired.
Less than a month later, Justice Gorsuch wrote the unanimous opinion in Henson v. Santander. In that case, the Justices ruled that moneylenders that turn over delinquent accounts to companies which they own are entirely immune from the FDCPA. In other words, if Bank simply transfers a past-due account to another division, Bank may be able to use such tactics like:
- Making repetitive phone calls which are designed to annoy or harass the debtor,
- Using harsh or abusive language, or
- Threatening to undertake actions of dubious legality.
The Supreme Court will most likely further erode the FDCPA when the issue comes up again. At that point, Minnesota’s debt collection controls may be void under the Constitution’s Supremacy Clause.
The Stay
In coming years, Section 362 of the Bankruptcy Code may be about the only protection that consumers have from aggressive debt collectors. The automatic stay applies to all creditors, whether it is a bank, the IRS, a neighborhood garage, or Uncle Joe.
The FDCPA largely controls how moneylenders and debt-buyers can behave when they try to collect money. Section 362 limits the things that these companies and individuals can actually do. IN most cases, if the debtor is in bankruptcy, no creditor can:
- File or prosecute a lawsuit,
- Garnish wages,
- Attempt to collect the debt,
- Repossess collateral, or
- Foreclose on a security agreement.
Domestic Support Obligation (DSO) matters, such as alimony and child support, are generally exempt from the stay. If the state is garnishing wages for child support, such garnishment may stop for a couple of weeks. But, a Minneapolis bankruptcy judge will almost certainly reinstate it.
In other situations, the moneylender must essentially prove that the debtor will destroy the collateral if the creditor does not repossess it. Assume Harry Homeowner has a $20,000 mortgage delinquency. As long as he can easily pay it back during the protected repayment period, his house is probably safe. But what if he does not have homeowners’ insurance, can barely afford the debt consolidation payment, and/or has told people he plans to burn down the house to spite the bank? Under these facts, a Minnesota judge might side with the bank and allow it to foreclose.
Debt Discharge
At the end of a Chapter 7 or Chapter 13, the bankruptcy judge signs a discharge order. This order eliminated the debtor’s legal obligation to repay the debt.
It’s very important for both debtors and creditors to understand exactly what that action means. The Minneapolis judge cannot eliminate any collateral consequences of the debt. If Harry Homeowner owes back tuition to State U., the institution cannot try to collect the debt. However, it can withhold Harry’s transcripts until he pays or the two parties reach a separate agreement.
Special issues sometimes arise with personal property. If Harry bought an expensive television with a store-issued credit card, the debt may be secured. But the point is probably moot. The store will most likely not want a used TV set that has lost most of its value.
Bankruptcy sets rules for creditors and gives debtors a fresh start. For a free consultation with an experienced bankruptcy attorney in Minneapolis, contact Kain & Scott. After-hours appointments are available.
