It’s worth pausing to note that, unlike stay violations, which have a clear statutory basis for the recovery of damages – 11 U.S.C. § 362(k) – there is no such provision in § 524. To receive awards and sanctions in a discharge violation, you must invoke the court’s general powers and authorities in § 105 and case law. The standard of proof is ‘clear and convincing’ evidence. And if the violating creditor is the IRS – administrative remedies at 26 U.S.C. § 7433(3) must first be exhausted.
From time to time, I will receive a phone call or letter from a former client of mine, concerned that they are still receiving billing statements in violation of the discharge they received in bankruptcy. Sometimes, these are legitimate complaints. Sometimes, the creditor wasn’t listed on the bankruptcy schedules (and for no-asset Chapter 7 cases, that’s not a big deal under Judge Kelley’s Guseck case). In either case, we send a polite reminder to the creditor, and 99% of the time, that’s the end of it. Very rarely do discharge violations need to be litigated in front of a bankruptcy judge.
Sometimes, the creditor that the client is complaining about was listed on their schedules, was discharged, and yet – I have to tell my client that there is no violation of the discharge. Why? Because my client owned a business – either a corporation, partnership, LLC, or other separate legal business entity. Let’s consider a very common example, so we don’t wander off into the land of abstracts.,,
John Doe is the sole owner, operator, and representative of Acme, LLC. Acme LLC incurred a business loan through Moneypenny Bank, which John Doe was required to personally guarantee. Acme LLC doesn’t do very well, and as a result, John Doe ceases business operations and files an individual bankruptcy case. He does everything his lawyer tells him to do, he receives his discharge, and a month later, he starts receiving bills from Moneypenny Bank.
What went wrong?
Well, nothing, actually. John Doe filed for bankruptcy. Acme LLC did not. The bankruptcy discharge protects John Doe from being personally collected against from Moneypenny Bank. However, Moneypenny Bank can still attempt to collect against Acme LLC. John Doe continues to receive correspondence because he is the owner and representative of Acme LLC. John Doe looks at the billing statements again and realizes that the bills are not addressed to him (John) but to his business (Acme).
While this is not a violation of the discharge, John is annoyed by the billing statements. Is there anything he can do to stop the billing statements?
Moneypenny can continue to collect against Acme LLC until one of three things happens…
Option 1: Acme LLC pays the debt, as agreed. This option is the likely route if John Doe intends for Acme LLC to continue to exist and operate. Since John Doe is the sole owner of the LLC, this means that the money is ultimately coming out of his own pocket. But that is the consequence of owning the LLC.
Option 2: Acme LLC can file bankruptcy. This is generally an unnecessary step if John Doe intends to fold the business. There may be certain benefits to liquidation under Chapter 7 (such as the distribution of assets to priority creditors). If Acme LLC is to continue operating but needs to file bankruptcy, it would have to do so under Chapter 11. In either event, I leave it to bankruptcy attorneys who specialize in business filings to explain those benefits.
Option 3: Formally dissolve Acme LLC. Dissolution of a business is the corporate equivalent of death of an individual. Creditors can’t collect against dead people (though they can collect against probate estates). Nor can Moneypenny Bank collect against an LLC that doesn’t exist. Again, I leave it to business attorneys to discuss the proper steps to formally dissolve a business (you want to make sure your LLC is dissolved properly to avoid issues with government agencies and taxing authorities). But this is the simplest and most straightforward way to deal with the problem if John Doe does not intend to continue on with Acme LLC.
Of course, Moneypenny Bank will retain certain rights. For example, if they have a lien on assets – they will be able to exercise those security rights. They may also have rights if Acme LLC owns non-pledged assets. To determine specific consequences of dissolution, speak to a competent business attorney.