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Arizona Fed. Court Holds No FDCPA Violation for Collecting on Ex-Spouse’s Discharged Debt

Arizona.The U.S. District Court for the District of Arizona recently held that a debt collector did not violate the federal Fair Debt Collection Practices Act (FDCPA) by attempting to collect on a debt because a debtor’s spouse’s bankruptcy proceedings did not discharge the debt to the extent that the debtor himself may be liable for it.

A copy of the opinion in Parker v. First Step Group of Minnesota LLC is available at:  Link to Opinion.

The debt at issue arose prior to June 2010, and both the debtor and his wife were liable on the debt.  In June 2010, the debtor’s wife filed for Chapter 7 bankruptcy.  In October 2010, his wife received her Chapter 7 discharge.  In June 2011, the couple divorced.  In February 2014, a debt collector sent the debtor a demand letter stating the debtor owed a balance of $3,527.37.

The debtor alleged that the debt collector violated the FDCPA by attempting to collect a debt that was no longer valid because it was discharged in the debtor’s ex-wife’s bankruptcy.  More specifically, the debtor claimed that the debt collector “used false, deceptive, or misleading representations or means in connection with the collection of a debt . . . by . . . attempting to collect a debt that is no longer valid.”

The Court held that the debtor’s allegations failed because the debtor’s spouse’s bankruptcy “did not discharge the debt to the extent he may be liable for it.”

The general rule is that, when one spouse files for bankruptcy, the other spouse is not discharged of liability. In re Kimmel, 378 B.R. 630, 636 (B.A.P. 9th Cir. 2007) aff’d, 302 F. App’x 518 (9th Cir. 2008).

“Pursuant to 11 U.S.C. § 524(a), a discharge under Chapter 11 releases the debtor from personal liability for any debts. Section 524 does not, however, provide for the release of third parties from liability.”  In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995).

The Bankruptcy Code, at 11 U.S.C. § 524(e), provides that “[e]xcept as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”  In turn, subsection (a)(3) provides in relevant part that a creditor cannot recover from the “interests of the debtor and the debtor’s spouse in community property that is under the . . . joint management and control of the debtor.” 11 U.S.C. § 524(a)(3), 541(a)(2).

Under Arizona law, “spouses have equal management, control and disposition rights over their community property.” A.R.S. § 25-214(B).  Thus, “the effect of § 524(a)(3) is that all community property acquired post-bankruptcy is protected by the discharge.”  In re Kimmel, 378 B.R. 630, 636 (B.A.P. 9th Cir. 2007) aff’d, 302 F. App’x 518 (9th Cir. 2008).

Thus, the Court noted that, for the duration of the marriage, “§ 524(a)(3) can operate to provide nondebtor spouses with a de facto partial discharge of their separate debts by enjoining a creditor from attaching community property in which the nondebtor spouse has an interest.”  Id.

The Court also noted that, “[a]lthough the personal liability of a nondebtor spouse survives the bankruptcy, this liability can only be enforced against separate property, not community property” because “a judgment creditor of the nondebtor spouse on a community claim loses the ability to collect from anything other than the judgment debtor’s separate property.” Id.

However, the Court further noted that this protection “applies only so long as there is community property,” and “[d]issolution of the marriage . . . terminates the community, at which point after-acquired community property loses its § 524(a)(3) protection.” Id.

Here, when the debt collector attempted to collect the debt, the debtor was no longer married to the ex-wife who received the bankruptcy discharge.  Accordingly, the Court found that the debtor no longer had any community property for section 524(a)(3) to protect.

Therefore, the Court held that the debtor remained liable for debts discharged as to his ex-wife in his ex-wife’s bankruptcy, and that the debt collector did not violate FDCPA by attempting to collect on the debt.

However, the Court also denied the debt collector’s motion for attorney’s fees and costs because it found that the debtor did not bring the action in bad faith or for the purpose of harassment.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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