Simmons, Jannace & Stagg Obtains Bankruptcy Ruling of National Significance

October 31, 2006 Syosset, New York

In a case of national significance, Thomas Stagg of Simmons, Jannace & Stagg, LLP recently obtained a ruling from the United States Bankruptcy Court in New York that clarifies a credit card company's obligation to consumers. The ruling is important to both creditors and debtors because it deals with what are known as "discharge violation" claims that are now commonly asserted by debtors against creditors following their discharge in bankruptcy. Before this decision, it was unclear whether a creditor was required to take affirmative steps following a debtor's discharge to notify a credit reporting agency that its pre-petition report of an account delinquency ended in a bankruptcy discharge. The ruling in In re Bruno, 356 B.R. 89, 2006 WL 3086307 (Bankr. W.D.N.Y. Oct 31, 2006), makes it clear that a creditor does not violate the discharge injunction contained in 11 U.S.C. § 524 simply because it has not reported an account as discharged in bankruptcy. Few courts have ruled on this seminal issue, so the court's well-reasoned decision provides necessary guidance.

In the case, which was pending in federal court in the Western District of New York, Thomas Stagg and Jacqueline Della Chiesa of Simmons, Jannace & Stagg argued before the Bankruptcy Court that the firm's client, a national credit card company, did not violate § 524's discharge injunction. The court was called upon to determine whether a credit card company can violate the discharge injunction by having truthfully reported, prior to a debtor's bankruptcy filing or discharge, that a debt was charged off, in a situation in which the creditor had absolutely no post-discharge contact with the debtor. The debtor's principal argument was that the credit card company's ministerial pre-bankruptcy reporting, standing alone without any other action by the company, constituted an attempt to hold the debtor liable on a debt that was later discharged. Simmons, Jannace & Stagg contended that for the debtor to prevail, the court must hold that a creditor's mere inaction constitutes an act to collect a debt prohibited by 11 U.S.C. § 524.

Before the debtor had filed for bankruptcy protection, the credit card company had reported to a credit reporting agency that the debtor's credit card account was past due, had been charged-off, and had a remaining balance left owing and unsatisfied. The debtor filed a Chapter 7 bankruptcy petition and was ultimately discharged. Simmons, Jannace & Stagg pointed out to the court that at no time after the filing of the petition did the credit card company communicate with the debtor or make any affirmative attempt to collect the debt, nor did the company further report to the credit reporting agency. After discharge, the debtor learned that his credit report did not show that the credit card debt had been discharged in bankruptcy. He filed suit against the credit card company arguing that the company violated § 524's discharge injunction by not updating his account to reflect that it was discharged in bankruptcy, claiming that he was denied the "fresh start" he was entitled to following his discharge. The debtor sought to show that because the credit card account did not reflect the bankruptcy discharge, he was either denied credit that he would have obtained had the credit report shown that the debt had been discharged or that he paid higher rates for the credit that he obtained following his discharge. However, the court agreed with Simmons, Jannace & Stagg and held that § 524 does not require a credit card company to take additional steps to clarify that an account was discharged in bankruptcy. The decision makes it clear that § 524 is not a proper remedy for such debtors.