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Zombie Debt and the Metaphysics of Discharge

posted by Adam Levitin

The NYT has a piece about credit reporting of so-called "zombie debt"--debt that has been discharged in bankruptcy.  Apparently the US Trustee Program is investigating various creditors in connection with this debt.

The reporting obscured a bit of very subtle bankruptcy metaphysics. The discharge of debt in bankruptcy does not void the debt. The debt is still owing. But it cannot be collected except if the debtor volunteers to repay it. The discharge is an injunction against the enforcement of the debt against the debtor as a personal liability. The discharge voids judgments on the debt, but not the debt (and it does not prevent the enforcement of liens).  In other words, the debt still exists post-discharge.  It just isn't enforceable.

That means that there is nothing per se inaccurate about the debt being reported to a credit reporting agency as owing, provided that the debt is also reported as discharged in bankruptcy. (Different story altogether under Fair Credit Reporting Act and Fair Debt Collection Practices Act if the discharge is not reported.)   

As far as I can glean from the reporting, the problem seems to be less the continued reporting of the debt than creditors saying that they will only cease reporting it as owing if the debt is paid.  Is that a violation of the discharge injunction?  I'm not sure.  It is fine for a private party to require payment as a condition of future dealings:  "pay up if you want to do another deal with me." But that's not quite this situation. The purpose of continuing to report a discharged debt is not to invite a condition of future dealings.  Instead, its purpose (other than if continued reporting were the default) would seem to be to extract payment, which would be an "act to collect, recover, or offset any such debt as a personal liability of the debtor."  It'll be interesting to see more about how this plays out. 


I'm not convinced your very subtle metaphysical point is correct. A discharge order discharges the debtor from any liability on a claim. At that point, what component or quality of the prepetition debt is NOT void? No liability, no debt--which should make the reporting of a debt as "owing but discharged" a legal impossibility and a violation of the FCRA.

How does (a)(2) apply?

11 U.S. Code § 524 - Effect of discharge
(a) A discharge in a case under this title—
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; and

A lot of the problems described in the story don't arise directly from collection efforts by the creditors, but rather from acts by third parties denying employment, leases or loans based on the discharged debts appearing in the credit reports. However, it is unlikely any legal theory will hold up to make the creditors liable for damages caused by the decisions of third parties, especially given that most of the acts of the third parties are 100% legal (for example, Section 525 has been held not to reach hiring decisions by private employers). So, what this situation really points up is the extent to which debt is treated as a scarlet letter, and the extent to which we are unwilling to regulate the uses to which credit information gets put.

Alan--we know that discharge isn't the same as voiding a debt because if the debt is secured, the creditor can still repossess the collateral. The debt just becomes non-recourse as a result of the discharge. It's precisely this situation that gives rise to "ride thru".

James--reporting a debt as unpaid but discharged isn't an "act to collect" a debt.

FJP--good point that the harm is really from third party actions. I suspect the 3d parties aren't responding to the debt being listed so much as to the bankruptcy filing, which can stay on the credit report for 10 years.

I am not sure about the harm having the debt on a credit report. If I am an employer/landlord and I have a choice between two equal candidates, one with a bankruptcy and one without one, who do you think I am going to choose? Why should I take the time to figure out why there is a bankruptcy? That said, I would not really care about an unpaid debt as much, given that there is a bankruptcy out there.

I do agree, however, that placing a debt on a credit report should not be used to extort payment (although it is done both pre- and post-bankruptcy).

I would point out, however, that having a bankruptcy or a discharged debt on a credit report undermines the entirity of a "fresh start" from bankruptcy.

Why not just have bankruptcy erase ALL pre-petition information on a credit report? It is not like a bank would give a 40 year old (for example) with no credit history a better rate than one with a bankruptcy on the record.

I wouldn't say that bankruptcy is supposed to give people a "clean slate." Rather it is supposed to have two effects. It is supposed to prevent us from having large numbers of people who are so consumed with debt payments that they never have any chance of breaking even. And more than that, it is supposed to dissuade lenders from continuing to lend to people who are in danger of ending up with debt payments that are unsustainable. Indeed reducing the lending to the insolvent is a goal, rather than encouraging a new round of lending to the imprudent.

Adam, you are a valiant Zombie killer, but they are everywhere now.. and surrounding my gate as we speak.

Consider this scerio .. its mine.. facing a third party zombie the 7th ive killed but they keep coming back.

bringing it at one in a million ,,,,,left standing from a non gse MBS fraud, .. almost seven years after the debt became proven invalid

Im faced with a suit over 2 1/2 times value of collateral it seeks to devour. For 22 years here safe then found by a zombie landing here recently with no true name, right, standing or soul.

A third party grown fat off of bad debt and deception. Running ahead of case law and public awareness.

We are still out there, those lucky enough to ha be aware of the illegality of the acts against them. I am personally terrified but still alive and looking forward to it.. actually.

Motivated by the beauty and miracles of life, and my research of law and mentored personally and remotely by leaders of academia, science, business those who know me and those I'll never meet.

Your elequence, and Academia is lost here in my own life.. The interpretation of.... damage,... the effect of third party actions on consumers in law and in life.

The ethics the ethos, of consumer law and consumer protection, not just the integrity of "bankruptcy" is at stake.

AKA the American Dream .. cannot be articulated and somehow . we must make our own dreams more real than any ....zombie. myth, label or rating defines us.

Im as confused as the last time i commented on a credit slips blog, yours, to be exact. Its MIASMA. This christmas will be special.. maybe I will feel peace a little or maybe even happiness for the first time in seven years or maybe it will suck. Either way..

Im with you. When I grow up I want to be a zombie killer.


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