Does a creditor’s good-faith belief that a discharge injunction does not apply to its debt preclude a finding of civil contempt? Due to a circuit split, the U.S. Supreme Court was asked to decide this issue.
Once a debtor receives a bankruptcy discharge, it “operates as an injunction against the commencement or continuation of an action ... to collect, recover or offset any such debt as a personal liability of the debtor.” 11 U.S.C. § 524(a)(2). The purpose of the discharge injunction is to ensure the debtor receives a “fresh start” and is not coerced into repaying a discharged debt. If a creditor’s contempt is established, the debtor may be able to recover damages as a sanction against the creditor.
Generally, courts hold a creditor in contempt for violation of the discharge injunction if (i) the creditor knew the discharge injunction was applicable, (ii) the creditor intended to take the action, and (iii) the action was an attempt to collect a discharged debt. A majority of courts allow punitive damages for a violation of the discharge injunction. In considering whether punitive damages are appropriate, courts generally consider whether the creditor specifically intended to violate the discharge injunction. In the First, Fourth, and Eleventh U.S. Circuit Courts of Appeals, however, the creditor’s intent is not a defense to a finding of contempt, but rather only a factor in determining whether punitive damages are appropriate. On the other hand, the Ninth Circuit recently held that the creditor’s subjective, good-faith belief that the discharge injunction did not apply to its debt precluded a...
