Every so often I receive a call from a former client that I represented in a Bankruptcy case complaining about a creditor attempting to collect a debt discharged in the client’s case. I understand that mistakes happen. Information does not get to the proper party. Computers malfunction. However, it is frustrating when the actions of a creditor could be remedied by better training and/or instruction.
The facts for my most recent former client to contact me are familiar. The client files a Chapter 7 petition and receives his discharge. The debtor owned real property in the City of Toledo that he does not intend to retain. An outstanding water bill to the Department of Public Utilities is listed on the petition. A foreclosure complaint is filed and the real property sells at a foreclosure sale. There are insufficient proceeds to pay all of the liens against the property, so the bill to the City for water is unpaid.
Water and sewer bills are different from most creditors. The unpaid balance due to the Department of Public Utilities will become a lien against the real property and can be enforced against the real property. If a sale occurs, the unpaid balance may be paid from the sale proceeds.
In an all too common fact pattern, the City DPU contacts the debtor after the Bankruptcy Discharge has been entered and after the foreclosure is final. A new owner is in place, but the proceeds of the foreclosure sale did not satisfy the water/sewer bill. The City DPU seeks to collect the unpaid balance from the debtor, the prior owner, claiming that the Bankruptcy Discharge does not affect the lien. Their argument is that a lien cannot be discharged. They are correct that a bankruptcy discharge does not eliminate the lien. However, the bankruptcy discharge eliminates the personal liability of the debtor to pay the City for the unpaid water bill. The creditor cannot seek payment from the debtor for the unpaid prepetition debt. The City DPU’s only remedy is to enforce the lien against the real property. Since there were insufficient proceeds of sale, the bill remains unpaid and the lien is now extinguished via the foreclosure action.
The City DPU is in violation of the Discharge injunction when it contacts a debtor to demand payment in a scenario as outlined above. The injunction prevents any action to collect, recover or offset any discharged debt as a personal liability of a debtor. A debtor may bring a civil contempt proceeding if a creditor persists in collecting a prepetition debt that has been discharged. If successful, the debtor may be awarded compensatory damages and attorney fees.