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Can courts penalize creditors for going after those in bankruptcy?

The highest court in the country provides guidance on collection efforts after bankruptcy.

One of the key benefits of a successful petition for relief through bankruptcy is the ability to stop the continued attempts of creditors to receive payment. Bankruptcy achieves this goal with a court order that instructs creditors to cease from collection efforts. A recent case called into question what would happen if the creditor attempted to receive payment in good faith while a stay was in effect.

Business partners and collection: Is a reasonable attempt to gain payment after a court grants a bankruptcy petition allowed?

The case began when a creditor attempted to collect from an individual after he had filed for bankruptcy protections through a Chapter 7 bankruptcy petition.

The facts of the case begin when business partners sued a former partner, Taggart, for violating the business’ operating agreement. During the lawsuit, the Taggart petitioned for, and received, relief through a petition for Chapter 7 bankruptcy. After the bankruptcy court discharged his debts, the former partners received a judgment in their favor. They then recouped attorney fees from Taggart. In response, Taggart moved to hold the former partners in contempt as he had already received protection through bankruptcy.

The bankruptcy court agreed and held the former partners in contempt for their attempt, as creditors, to collect even though they were aware of the discharge order. The Bankruptcy Appellate Panel vacated this order and the Ninth Circuit affirmed. Taggart appealed the case to the Supreme Court of the United States (SCOTUS).

SCOTUS provides guidance: What happens in this situation?

The Bankruptcy Appellate Panel used something called the good-faith standard to justify vacating the lower court’s order. Critics stated the standard was too subjective and argued for a more clear-cut rule. SCOTUS agreed. The Supreme Court put forward a new standard called the “objective reasonableness” standard that essentially has courts providing more protection to debtors in similar situations.

Does this mean the creditors are barred from getting payment?

Not quite. The ruling protects debtors while allowing creditors to pursue debts that survive bankruptcy. As such, the case was remanded, or sent back to the lower courts, to review the facts based on the new objective reasonableness standard. In this case, it will likely result in the court reviewing whether or not the debt in question survived the bankruptcy petition.

The case provides an example of the complex nature of bankruptcy. Issue can arise and those who are seeking relief and a fresh financial start are wise to act to protect their interests. An attorney experienced in the intricacies of bankruptcy law can help.