Night of the Living Debts!

November 17, 2014

You may think that your bankruptcy case will discharge all pre-bankruptcy financial obligations and stop all future debt collection cold. You may think that these debts are dead and buried, never to rise again. That’s the power of the federal bankruptcy law, right?

Or is it?

The truth is that there are several types of debts that survive a bankruptcy case, like debts excepted from discharge by law (e.g. taxes or student loans); or debts excepted from discharge by the bankruptcy court (e.g. credit card charges for a spending spree on the eve of bankruptcy). However, there is one type of debt that is rarely discussed, the “Zombie Debt.”

Zombie Debts in bankruptcy are those debts that are dead and buried (discharged), but somehow manage to come back to haunt you. Essentially, they are pre-discharge obligations that cause new, unexpected debts after the bankruptcy case. Here are a few common examples of Zombie Debts:

Real Property Zombie Debts

Many debtors have been shocked by real property zombie debts after a bankruptcy discharge. It is well-known that the discharge prevents the mortgage company from ever collecting from you. What is not well-understood is that the bankruptcy court does not transfer ownership of the property back to the bank. You still own the real property, and are obligated to pay any non-mortgage obligations that arise after the bankruptcy discharge and before the property is transferred. Some Zombie Debts that you may encounter are HOA fees, insurance, and upkeep costs.

Bank Zombie Debts

You may have discharged your bank account, but you are still obligated for any charges for bounced checks after the bankruptcy case is filed. Even if the check itself is discharged, such as a payday loan check, the check may still be presented for payment and cause a fee. Likewise, a forgotten automatic bill pay connected with a closed account can cause a bank charge. Post-bankruptcy debts are not included in the bankruptcy case.

Uninsured Property Zombie Debt

Attorneys commonly caution debtors to maintain insurance on property that will be surrendered back to a creditor. The common situation is an automobile in a Chapter 7 case. The debtor continues to drive the car until the creditor seeks to repossess it. Oftentimes a creditor will wait to repossess until after the bankruptcy discharges and the automatic stay is lifted. But what if the car is meanwhile damaged in an accident?

If there is not enough insurance to cover the damage to the vehicle, the debtor may have created a Zombie Debt. The debtor has an obligation to safeguard and protect the creditor’s property. This includes maintaining insurance. Damage to property (such as to an automobile or to real estate) that is not covered by insurance may be a post-bankruptcy liability that is enforceable against the debtor.

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