Cite as: Keith M. Lundin, Lundin On Chapter 13, § 162.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Section 524(d) applies in Chapter 13 cases: After the court has determined whether to grant a discharge under § 1328, the court “may hold a hearing at which the debtor shall appear in person” at which the court informs the debtor about the discharge. Bankruptcy Rule 4008 provides that the court “may” hold a hearing as provided in § 524(d) “not more than 30 days following the entry of an order granting or denying a discharge . . . and on not less than 10 days’ notice to the debtor and the trustee.”
The conduct of discharge hearings is problematic in Chapter 13 cases. Most Chapter 13 cases are three to five years old at the time of entry of discharge. It is difficult to locate Chapter 13 debtors and even more difficult to convince them to appear at a discharge hearing after years of making and finally completing payments. Some jurisdictions read the plainly permissive language of § 524(d) and make the reasonable choice not to require discharge hearings in Chapter 13 cases. Some courts conduct the discharge hearing on an affidavit from the debtor. Some courts include the content of a discharge hearing in debtor education at the § 341 meeting or during administration of the case. If the debtor must appear in person, debtor’s counsel has to keep track of the debtor for the duration of the case (a good idea anyway) and drag the debtor to court one last time when it is all over except the praise. Counsel should warn debtors that some courts withhold entry of discharge orders until debtors appear in person at a discharge hearing.
Reaffirmation under § 524(c) is permitted but rarely seen in Chapter 13 cases.1 In Chapter 13 cases filed before October 22, 1994, § 524(d) required a reaffirmation hearing, typically in conjunction with the discharge hearing, at which the debtor was required to appear to receive appropriate admonitions.2 In Chapter 13 cases filed after October 22, 1994, if the debtor is represented by an attorney while negotiating a reaffirmation agreement and if the agreement contains a clear and conspicuous statement of advice to the debtor consistent with § 524(c), the agreement will be enforceable without the hearing required by prior law.3 The bankruptcy courts have discretion to require reaffirmation hearings in cases filed after October 22, 1994. Counsel has to know local practice to know whether the debtor will be required to attend a reaffirmation hearing in a Chapter 13 case filed after October 22, 1994. If the debtor was not represented by an attorney during the negotiation of the reaffirmation agreement, the reaffirmation hearing is mandatory else the agreement is not enforceable.
The entry of discharge in a Chapter 13 case triggers the discharge injunction in § 524. In language somewhat broader than the automatic stay applicable during the case,4 § 524(a)(2) provides:
A discharge in a case under this title—
(2) 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.5
When all is said and done in a Chapter 13 case, the discharge injunction is the teeth that forever protect the debtor from the collection of discharged debt. The bankruptcy court retains jurisdiction to police violations of the discharge injunction.6 Although there is a growing consensus that § 524 does not authorize an independent action for damages for violation of the discharge injunction,7 it is generally held that contempt is an available remedy for violation of the discharge injunction in Chapter 13 cases.8
A common test of the discharge injunction in Chapter 13 cases is collection action by a mortgage holder after the completion of payments and discharge.9 The repeating fact pattern is a debtor emerging into the sunlight of a completed Chapter 13 plan that cured default on a home mortgage only to receive a foreclosure notice in which the (successor) mortgage holder claims thousands of dollars of “defaults” not paid through the plan. The debtor’s response is to reopen the Chapter 13 case and seek sanctions for violation of the discharge injunction. Because home mortgages typically are “long-term” debts treated through the plan under § 1322(b)(5) that are excepted from discharge by § 1328(a),10 the discharge injunction has not always provided debtors a remedy.
For example, in Telfair v. First Union Mortgage Corp. (In re Telfair),11 the confirmed plan cured default and maintained payments with respect to a home mortgage held by First Union. After confirmation, the debtors defaulted, First Union filed motions to lift the stay and assessed attorneys’ fees and expenses against the debtors pursuant to the mortgage contract. First Union also charged the debtors for force-written insurance premiums. When the debtors completed plan payments and received a discharge, First Union served a notice of foreclosure. The debtors responded with a class action challenging the way First Union applied postconfirmation plan payments and alleging that First Union violated the automatic stay and the discharge injunction. The bankruptcy court and Eleventh Circuit found no violation of the discharge injunction:
[T]he debtor’s plan requires the debtor to “make regular post-petition payments as they become due” and requires the filing of a claim “for prepetition arrearage on such obligation [to be] paid by distributions from the Chapter 13 Trustee.” The plan does not provide for the payment of postpetition debt other than regular monthly payments. Additionally, the discharge of § 1328(a) specifically excludes any debt provided for under § 1322(b)(5), which provision applies to the treatment of the debt due First Union under the debtor’s plan. . . . As the discharge does not affect the debt due First Union, the discharge injunction of § 524 has no application.12
In contrast to the finding in Telfair, a mortgage holder’s almost unbelievable greed transgressed the discharge injunction in In re Riser.13 The plan confirmed in Riser in 1997 provided that the debtor would make regular monthly payments to Norwest Mortgage, Inc., and cure the default in the amount of $1,283.82. Norwest did not object to confirmation. Norwest filed a proof of claim for an arrearage of $5,944.26. The debtor objected, and the arrearage claim was disallowed on proof that it included nonexistent property inspection fees, property preservation fees and projected postconfirmation interest.
The debtor made all payments under the confirmed plan and received a discharge in April 2000. During the Chapter 13 case, Norwest at no time indicated any change in the escrow account or in any other amount due under the mortgage.
A few months after discharge, Wells Fargo, successor to Norwest, filed a foreclosure action against the debtor. After correspondence from debtor’s counsel, Wells Fargo voluntarily dismissed the foreclosure action and paid $1,000 in attorney fees and $500 in damages to the debtor to avoid sanctions for violation of the discharge injunction.
Between March 2000 and August 2002, Norwest and Wells Fargo continuously dunned the debtor. Debtor’s counsel wrote six letters attempting to educate Norwest and Wells Fargo about the completed Chapter 13 case and reminding Wells Fargo of the aborted foreclosure. Wells Fargo persisted, at one point demanding nearly $11,000 described as “allowable corporate advances.” Included in the $11,000 was—yes, you guessed it—the attorney fees and damages Wells Fargo paid for the foreclosure it commenced in violation of the discharge injunction!
The debtor reopened the Chapter 13 case to seek sanctions. The bankruptcy court found that the mortgage was current at the completion of plan payments and that Wells Fargo was barred from collecting any “allowable corporate advances.” The bankruptcy court awarded $538.86 to the debtor for missed work and $10,999.28 for attorney fees.14 The court noted that § 524 “does not explicitly authorize monetary damages for a violation of the discharge injunction,” but the bankruptcy court did have authority to award actual damages “pursuant to the statutory contempt powers.”15 The court searched for but could not find authority to impose punitive damages.
The developing new Supreme Court jurisprudence with respect to Eleventh Amendment immunity may affect jurisdiction to determine the extent of the discharge and the reach of the discharge injunction in Chapter 13 cases. Prior to the Supreme Court’s decision in Tennessee Student Assistance Corp. v. Hood,16 Eleventh Amendment immunity had been recognized as a defense to a Chapter 13 debtor’s action to enforce the discharge injunction against a governmental unit or to determine the dischargeability of a claim owed to a state.17 In Hood, the Supreme Court found in rem jurisdiction for the bankruptcy court to determine the dischargeability of a student loan owed to a state agency.
Entitlement to discharge coincides with the end of the debtor’s obligation to make payments to the Chapter 13 trustee. Debtor’s counsel may have some responsibility to stop the income deduction order at completion of payments under the plan.18 In some jurisdictions, the Chapter 13 trustee requests an order terminating any income deduction order when the plan is paid in full. In some jurisdictions, the debtor’s attorney has to file a motion to stop the payroll deduction.
It can be a real hardship on the debtor for deductions to continue after completion of payments under the plan. Debtors imagine that the deductions will cease miraculously at the moment the Chapter 13 trustee has received enough money to pay all creditors under the plan. In reality, the deductions often continue for some time until an order stopping the deductions can be entered, mailed to the employer and processed by the employer’s payroll department.
Entry of discharge does not unwind the binding effect of the confirmed plan. For example, in In re Bacon,19 after discharge $1,432.66 that had been distributed under the plan but that was not owing because of a refinancing during the case was returned to the Chapter 13 trustee. The trustee redistributed the returned money pro rata to unsecured creditors. The debtor objected, claiming the money should have been returned to the debtor because unsecured debt was discharged at the completion of payments.
The bankruptcy court found the returned funds were part of the larger amount that the debtor was required by the plan to pay to the trustee. Absent modification, “unsecured creditors were entitled to a pro rata share of any funds remaining . . . . [E]ntry of a discharge . . . does not alter these facts.”20 Discharge did not eliminate the rights of creditors in money paid to the trustee because of § 524(e):21
[A]lthough the creditors could not proceed against the debtor personally for this debt, that does not necessitate that they do not have any rights in the money that was returned to the trustee. . . . [S]ubsequent to entry of discharge, creditors still have a claim against other entities, such as the bankruptcy estate, even though the individual debtor has been discharged and is no longer personally liable on the debt.22
Section 524(a)(3) contains an almost indecipherable discharge injunction specific to community property and community claims that is applicable in Chapter 13 cases. There are few reported Chapter 13 decisions daring to probe the extent of the discharge at the completion of payments in a community property state. In a monument to the complexity of the subject, the Bankruptcy Court for the Middle District of Louisiana exhaustively analyzed § 524(a)(3) to conclude that, when only one spouse files Chapter 13 in a community property state, the discharge injunction bars collection from the nonfiling spouse of a joint debt that would be nondischargeable in a Chapter 7 case.23
1 See §§ 4.7 [ Substantial Reaffirmations Are Probable ] § 8.8 Too Many Reaffirmations, 4.8 [ Debtor Cannot Reaffirm or Redeem Property ] § 8.9 Debtor Cannot Reaffirm or Redeem Property and 179.1 [ Frequency of Filing Bankruptcy—Chapter 20 and Beyond ] § 104.2 Frequency of Filing Bankruptcy—Chapter 20 and Beyond.
2 11 U.S.C. § 524(d) (prior to amendment in 1994).
3 11 U.S.C. § 524(d), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 103, 108 Stat. 4106 (1994).
4 For example, there is no exception to the discharge injunction analogous to the exception to the automatic stay in § 362(b)(1) for the commencement or continuation of a criminal action against the debtor. See § 70.1 [ Criminal Action or Proceeding Exception ] § 58.7 Criminal Action or Proceeding Exception. Arguably, the discharge injunction would prohibit even a criminal action for collection of a dischargeable debt.
5 11 U.S.C. § 524(a)(2).
6 See In re Loving, 269 B.R. 655 (Bankr. S.D. Ind. 2001) (Bankruptcy court retains jurisdiction, and debtor’s Motion to Enforce Discharge is procedurally sufficient to present question whether collection of student loans four years after Chapter 13 discharge violated discharge injunction. Motion denied because student loans were neither paid in full nor discharged by completion of payments under plan.); Steele v. Ocwen Fed. Bank (In re Steele), 258 B.R. 319 (Bankr. D.N.H. 2001) (Although bankruptcy court has jurisdiction over claim in debtor’s complaint that mortgage servicer violated the discharge injunction, bankruptcy court lacks even “related to” jurisdiction over counts of complaint alleging violation of federal and state debt collection statutes.). But see Brown v. GMAC Mortgage Corp. (In re Brown), 300 B.R. 871 (D. Md. 2003) (After discharge, bankruptcy court lacked jurisdiction to entertain debtor’s adversary proceeding to recover fees and charges by mortgage holder in connection with sale of debtor’s home during Chapter 13 case.).
7 See Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002); Cox v. Zale Del., Inc., 239 F.3d 910 (7th Cir. 2001); Pertuso v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir. 2000).
8 See In re Knight, No. 99-71239, 2003 WL 22038423, at *2 (Bankr. C.D. Ill. Aug. 28, 2003) (unpublished) (Illinois Department of Revenue is ordered to pay punitive damages of $1,000 for repeated violations of the automatic stay and of the discharge injunction. Despite prior motions for sanctions and assessment of attorney fees, Department of Revenue was apparently incapable of stopping notices to the debtor before and after discharge. “The failure of the Court to award compensatory damages does not preclude an award of punitive damages.”); In re Riser, 289 B.R. 201 (Bankr. M.D. Fla. 2003) (Wells Fargo violated discharge injunction by attempting to collect “allowable corporate advances” when confirmed plan specifically stated the amount of the mortgage and arrearages, the debtor completed payments and Wells Fargo did not prove any advances or other charges during the Chapter 13 case.), after hearing on sanctions, 298 B.R. 469 (Bankr. M.D. Fla. 2003) (Debtor awarded $538.86 for missed work and $10,999.28 attorney fees for Wells Fargo’s violations of the discharge injunction.); Thibodaux v. United States (In re Thibodaux),201 B.R. 827, 832–34 (Bankr. N.D. Ala. 1996) (IRS violated discharge injunction and is subject to sanctions where it repeatedly noticed collection and levied upon a debtor after discharge in a Chapter 13 case. Debtor scheduled the IRS and provided for full payment. IRS failed to file a proof of claim. Notwithstanding Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996), “there is no question that Congress can waive the federal government’s sovereign immunity. It has done so by adopting 11 U.S.C. § 106. . . . On six occasions after the discharge order became final . . . IRS violated Section 524’s discharge injunction. . . . These repeated attempts by IRS to collect discharged prepetition taxes from the debtor, despite repeated contact by Thibodaux’s lawyer, warrant a finding that the Internal Revenue Service has been in civil contempt of this court’s order and that Paul R. Thibodaux has been injured . . . . 26 U.S.C. § 7430 provides that attorney’s fees may be awarded a ‘prevailing party’ in tax litigation against the IRS. . . . [T]he taxpayer must demonstrate that IRS’ position was ‘not substantially justified.’ . . . Fed. R. Bankr. P. 9020 grants the court ‘jurisdiction to determine debtor’s motion to hold the United States in civil contempt and impose appropriate sanctions, including attorneys fees.’ . . . [D]amages of $1,510.00 . . . is reasonable compensation for the injury the debtor sustained because of the IRS’ contempt of this court’s order.”); Moulton v. United States (In re Moulton), 195 B.R. 954, 959 (Bankr. M.D. Fla. 1996) (Debtors’ counsel is entitled to double the Equal Access to Justice Act maximum attorney’s fee of $75 per hour because IRS has repeatedly, inexcusably and egregiously attempted to collect taxes that were discharged in the debtors’ Chapter 13 case. “[T]his Court is satisfied that the continuing litigation and defense by the Government to totally indefensible conduct by the IRS may properly be considered as ‘special factor,’ sufficient to warrant an enhancement in addition to the application of the C.P.I. to the standard cap. . . . [T]he appropriate hourly rate is $150 or double the statutory cap of $75.00.”). See also § 162.1 In General, Including Discharge Hearing and Discharge Injunction, § 162.2 Discharge Injunction and § 524(i) after BAPCPA, § 162.4 Effects of Discharge on Liens after BAPCPA and § 162.6 Reopening Closed Cases.
9 See also § 79.1 Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman, § 80.13 Modification of Unsecured Home Mortgage: Before and After BAPCPA, § 80.14 Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations and § 120.4 11 U.S.C. § 1327(c): Free and Clear Effect on Liens for discussion of the effects of confirmation on mortgage holders; and see § 162.3 On Liens and § 162.4 Effects of Discharge on Liens after BAPCPA for discussion of the effects of discharge on liens.
10 See § 351.1 [ Long-Term Debts ] § 158.7 Long-Term Debts.
11 224 B.R. 243 (Bankr. S.D. Ga. 1998), aff’d, Case No. 98-00193-CV-1 (S.D. Ga. 1999), aff’d, 216 F.3d 1333 (11th Cir. 2000), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666, reh’g denied, 531 U.S. 1185, 121 S. Ct. 1173, 148 L. Ed. 2d 1030 (2001).
12 224 B.R. at 248–49.
13 289 B.R. 201 (Bankr. M.D. Fla. 2003).
14 See In re Riser, 289 B.R. 469 (Bankr. M.D. Fla. 2003).
15 289 B.R. at 472.
16 541 U.S. __, 124 S. Ct. 1905, __ L. Ed. 2d __ (2004).
17 See, e.g., In re Havens, 229 B.R. 613 (Bankr. D.N.J. 1998) (Complaints for injunctive relief and declaratory judgment that insurance surcharges were discharged in Chapter 13 cases and that state cannot suspend drivers’ licenses to enforce the surcharges were barred by Eleventh Amendment immunity. Supremacy clause may require the state courts to apply federal bankruptcy law to determine whether surcharges were discharged, but bankruptcy court cannot exercise jurisdiction over the Division of Motor Vehicles or the individually named state officials.). But see Goldberg v. Ellett (In re Ellett), 243 B.R. 741 (B.A.P. 9th Cir. 1999) (Chapter 13 debtor’s adversary proceeding against state taxing official to enjoin collection of a tax alleged to have been discharged in a Chapter 13 case fits the Ex parte Young exception to Eleventh Amendment immunity.), aff’d, 254 F.3d 1135 (9th Cir. 2001); Ellett v. Goldberg (In re Ellett), 300 B.R. 768 (Bankr. E.D. Cal. 2003) (Federal Maritime Commission v. South Carolina State Ports Authority, 535 U.S. 743, 122 S. Ct. 1864, 152 L. Ed. 2d 962 (2002), did not undermine Ninth Circuit’s holding in Goldberg v. Ellett (In re Ellett), 254 F.3d 1135 (9th Cir. 2001), cert. denied, 534 U.S. 1127, 122 S. Ct. 1064, 151 L. Ed. 2d 968 (2002), that Ellett may seek an injunction and declaratory relief under Ex parte Young, 209 U.S. 123, 28 S. Ct. 441, 52 L. Ed. 714 (1908), because discharge of taxes in Chapter 13 case was not a suit against the state for Eleventh Amendment purposes.), aff’d, 301 B.R. 570 (E.D. Cal. 2003).
18 Income deduction orders are discussed in § 125.1 Order to Debtor’s Employer and § 125.7 Special Deduction Order Problems: Entitlements, Pensions and Government Employers.
19 274 B.R. 682 (Bankr. D. Md. 2002).
20 274 B.R. at 685.
21 11 U.S.C. § 524(e) provides: “Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”
22 274 B.R. at 686.
23 First Louisiana Bus. & Indus. Dev. Corp. v. Dyson (In re Dyson), 277 B.R. 84, 90–109 (Bankr. M.D. La. 2002) (Prior to bankruptcy, a Louisiana state court entered judgment against the debtor and the debtor’s spouse for conversion and conspiracy. The judgment creditor filed a complaint for a declaration whether its debt would be discharged and the extent to which the discharge injunction would affect collection rights against the non-filing spouse and postpetition community property. “Generally speaking, § 524(a)(3) provides that the entry of a discharge in Mr. Dyson’s Chapter 13 case will cause Mrs. Dyson to receive a limited discharge, commonly referred to as the ‘split discharge,’ . . . barring collection against community property (half of which is hers) even though she did not file bankruptcy. . . . [U]nder § 524(e) (if there was no § 524(a)(3)), a debtor who obtains a discharge could be forced to live in community with his or her community creditors, who could, to the extent applicable under state law enforcement rights, displace the non-filing spouse’s interest in the post-petition community . . . . [Section] 524(a)(3) is a Congressional embodiment of the determination that in community property states, the entirety of the post-petition community should be insulated from community claims that are discharged in the debtor’s case . . . . [A]lthough the general effect of § 524(a)(3) is to preclude collection efforts by a pre-petition community claimant against the post-petition community of the debtor and his/her spouse, applicability of § 524(a)(3) to post-discharge collection efforts is not all-encompassing. The statute provides that post-discharge efforts to collect community claims are enjoined except to: ‘a community claim that is excepted from discharge under section 523, 1228(a)(1), or 1328(a)(1) of this title, or that would be so excepted, determined in accordance with the provisions of sections 523(c) and 523(d) of this title, in a case concerning the debtor’s spouse commenced on the date of the filing of the petition in the case concerning the debtor.’ . . . [T]he proper reading of the phrase, ‘is excepted from discharge . . . ,’ requires that the phrase mean that the general injunctive prohibition on collection efforts against the post-petition community is limited by excepting from its effect any debt actually excepted from the debtor’s discharge under § 523, as § 523 may be made applicable by other provisions of the Bankruptcy Code, i.e., through § 1328(a)(2). . . . In the instant case, it cannot be disputed that if Mr. Dyson successfully completes his Chapter 13 plan and thereby receives a discharge pursuant to the provisions of § 1328(a), the debt held by First BIDCO will be discharged, because debts described under § 523(a)(6) are not excepted from discharge under § 1328(a) . . . . In the context of § 524(a)(3), then, the debt owed to First BIDCO is not a debt which ‘is excepted from discharge under section 523, 1228(a)(1) or 1328(a)(1) . . .’ and therefore, does not fall within the first exception to the applicability of the general injunctive provisions of § 524(a)(3). . . . By use of the phrase ‘so excepted’ the statute refers back to the frame of reference of the filing spouse. . . . Thus, the phrase ‘so excepted’ must refer back to the nature of § 523 exceptions to discharge present in the filing spouse’s case. The hypothetical case necessarily analyzes the extent of the discharge in accordance with the standards applicable to that of the filing-spouse’s case, and does not extend, if the filing spouse’s case is a Chapter 13, beyond those provisions of § 523 delineated by § 1328(a)(2). . . . [B]ecause the debt is not a debt provided for under §§ 523(a)(5), (8), or (9), it would not be ‘so excepted’ from discharge had Mrs. Dyson joined Mr. Dyson’s bankruptcy case. Therefore, the debt will not be excepted from the application of the § 524(a)(3) injunction on collection against the Dyson’s [sic] post-petition community property should Mr. Dyson complete his Chapter 13 plan and receive a discharge under § 1328(a).”).