Court Expands Debtor Protections
A decision issued Monday by the Court of Appeals for the Second Circuit serves as yet another reminder of why collecting debt isn’t as easy as it used to be. As a matter of fact, if you are not careful, it can be downright treacherous.
First, some background. As I am sure most readers of this blog know, once a debtor files for bankruptcy an automatic stay goes into effect and creditors must cease debt collection activities. In Garfield v. Ocwen Loan Servicing, Miss Garfield obtained a mortgage that was subsequently taken over by Ocwen. She fell behind on her payments and filed for a Chapter XIII bankruptcy in the Western District of New York. As part of the bankruptcy settlement, she paid the arrears on her monthly loan payment and was discharged from her personal obligation on the mortgage loan. But she also agreed to pay $938 per month to prevent foreclosure on the mortgaged property. She subsequently made only one of those payments after her bankruptcy was discharged. Ocwen contacted Garfield and demanded that she not only pay what she owed in her post bankruptcy arrears, but also the amount that had been discharged in the bankruptcy.
I hope that last part of the sentence got your attention. Where a debt collector demands payment for a debt discharged in bankruptcy, it has violated the Fair Debt Collection Practices Act (FDCPA). This brings us to yesterday’s decision. The aggrieved debtor filed a lawsuit seeking damages under the FDCPA. Ocwen argued that, if anything, it had violated the bankruptcy code. It argued that Miss. Garfield’s only remedy was to seek a fine for Ocwem’s violation of the automatic stay. This may seem like a minor distinction, but our debt collector correctly assumed that a violation under the FDCPA cost a lot more than a contempt citation under the bankruptcy code. A lower court agreed that the bankruptcy code provided Garfield’s only remedy and dismissed the case.
But, yesterday the Second Circuit revived the lawsuit. It concluded that the two provisions could coexist in legal harmony. This case is certainly one to be mindful of, but keep in mind that the federal FDCPA does not apply to creditors such as credit unions seeking to collect on their own debt. From a practical standpoint, keep in mind that this entire situation would have been avoided had the debt collector not sought to collect on the debt that was discharged in bankruptcy.