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Can a creditor try to collect on a debt after it is discharged?

With the housing market reportedly rebounding across the country, some homeowners may be breathing a sign of relief or looking forward to not being underwater on their mortgages. Yet, for the many Colorado residents who lost their homes to foreclosure during the housing crisis or who are still under threat of losing their home, the damage may have already been done.

Perhaps the only thing worse than losing a home to foreclosure is being forced to pay the deficiency on the mortgage. This means that, after the home is sold through foreclosure, the homeowner still has to pay the bank the balance on the loan that was not paid off during the foreclosure. In California, some lenders are actively seeking to collect these debts. This can be devastating for many homeowners, who often think their payment obligations cease when the property is sold.

Yet, a recent court ruling could change the deficiency process, at least for some homeowners. A bankruptcy court in another state concluded that lenders could not be obligated to pay the deficiency because they had been discharged of the indebtedness. It remains to be seen whether the ruling will resonate with courts in other states.

The court thus viewed the discharge in a similar manner to a discharge in personal bankruptcy. When a person goes through the process of filing for bankruptcy and achieving a debt discharge, creditors may not undergo collection efforts on the discharged debt. Creditors are barred by law from taking any action designed to collect a debt that has been discharged in bankruptcy.

If the creditor does attempt to collect on a discharged debt, the debtor can move to reopen the bankruptcy case. At that point, the creditor could be sanctioned by the court, such as by civil contempt of court. Accordingly, bankruptcy law is very favorable to debtors once the debtor gets his or her debt discharged.

Source: Washington Post, "Tennessee bankruptcy court ruling could help former homeowners," Jun. 21, 2013

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