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A New Supreme Court Ruling Clarifies that a Creditor’s ‘Good-Faith Belief’ Isn’t a Defense Against Wrongfully Pursuing a Discharged Debt

Chapter 11 bankruptcy can provide a debtor with much-needed protection from creditors. Sometimes, though, creditors don’t abide by the rules and instead step over the line. When that happens, you need to know what to do ensure that your business is afforded the protection that the bankruptcy law says it should have. As part of this process, you’ll want to be sure that you have a South Florida attorney experienced in Chapter 11 bankruptcy issues representing your business.

Once you have filed for Chapter 11 bankruptcy and gone through all of the required steps of that process, the court will enter an order releasing your business from the obligation of paying most of its pre-bankruptcy debts. This, of course, is called the discharge order. Once it’s entered, the creditors whose amounts were included in the discharge are forever foreclosed from collecting those debts.

A recent U.S. Supreme Court decision looks at the very important question of what happens when a creditor attempts to collect a debt that has already been discharged in bankruptcy. The case involved B.T., a part-owner of business in Oregon who filed Chapter 7 bankruptcy. At the time that B.T. filed, the business and some other owners were litigating a civil lawsuit filed against B.T.

The debtor completed the bankruptcy process and the court entered a discharge order. Covered by the discharge order was any civil damages award that the co-owners and the business might receive from the civil suit.

Eventually, the plaintiffs sought and obtained an award of attorneys’ fees related to the state court suit. The state court demanded that B.T. pay $45,000 in attorneys’ fees. The debtor took this to the bankruptcy court, which determined that the creditors’ pursuit of attorneys’ fees in state court was a violation of the discharge order. The bankruptcy court held the creditors in contempt and ordered them to pay $110,000 of the debtor’s attorneys’ fees.

The creditor challenged that contempt penalty, arguing that it wasn’t in contempt because it had a “good faith belief” that it was entitled to seek that attorneys’ fees award. The Supreme Court, in its ruling on the case, explained that the creditor’s belief, be it in good faith or bad faith, was not the correct standard for analysis. If there is “not a fair ground of doubt as to whether the creditor’s conduct might be lawful under the discharge order,” then the creditor can be held in contempt for violating the discharge order. The creditor’s good-faith belief was relevant, but only for purposes of determining how severe the contempt sanction should be, according to the court’s opinion.

While B.T.’s was a Chapter 7 case, this ruling was still an important victory for Chapter 11 debtors, as it makes clear that creditors cannot use their “good-faith beliefs” as a defense against an action related to their wrongful attempts to collect a discharged debt.

The case of this debtor highlights how, even after the bankruptcy court has entered a discharge order, you may still face important legal challenges. To ensure that your business interests are protected the maximum possible extent, you need a skilled Chapter 11 attorney before, during and after the bankruptcy process. The knowledgeable South Florida bankruptcy attorneys at Stok Kon + Braverman are ready to help, having successfully represented Chapter 11 debtors for many years.

Contact us online or by calling (954) 237-1777 to schedule your consultation and find out how this firm can help you.

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