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Can Creditors Enforce Mandatory Arbitration Clauses in Bankruptcy?

Mandatory Arbitration Clauses: Not Enforceable in Bankruptcy

mandatory arbitration clauses in bankruptcy

Bankruptcy Discharge Violations Must Be Litigated in Bankruptcy Court, Says New York Court

Last month, a New York bankruptcy court ruled that a debtor’s action against Credit One for violating his discharge injunction by reporting his discharged debt as “charged off” on his credit report rather than “closed, discharged in bankruptcy” as required  could be argued before the bankruptcy court. Credit One argued that the “mandatory arbitration” clause in his original credit card application/agreement required that all disputes be resolved through a private arbitration or mediation and not through the very public Federal Bankruptcy Court system.

The court ruled against Credit One, holding that discharge violations are “core issues“—that is, necessary to and essential to the operation and function of the US Bankruptcy Code (the statute that governs the bankruptcy process in the United States)—and required to be litigated before the bankruptcy court and not behind closed doors.

This key ruling means that debtors are free to proceed with actions and, as in the case of the New York debtor, class actions against creditors who misbehave after bankruptcy cases are closed. Allowing creditors to rely on stock “mandatory arbitration” language in their credit application agreements would have almost universally barred people from seeking relief before the bankruptcy court as such clauses are almost universally utilized.

What is the Discharge Injunction?

The discharge injunction is the injunction issued under Federal law at the completion of a Chapter 7 or Chapter 13 bankruptcy case that says that a person who has filed bankruptcy no longer has any legal responsibility to repay any of their discharged, pre-filing debts. Any creditor who attempts to collect on a discharged, pre-filing debt does so in violation of the discharge injunction.

The discharge injunction bars creditors from engaging in a variety of activities, such as withholding student transcripts or mis-reporting credit reports, in addition to simple collections attempts.

Creditor who violate the discharge injunction are liable for contempt and sanctions in the form of money damages.

What does this mean in Detroit, Michigan?

Bankruptcy is a Federal legal process, but individual decisions made by local bankruptcy courts in New York do not necessarily require that bankruptcy judges in Detroit, Flint, Bay City, or Grand Rapids, Michigan must rule the same way. If the US Supreme Court rules a certain way on an issue, then that issue must be determined similarly in every bankruptcy court in the United States.

The decision regarding mandatory arbitration clauses in bankruptcy issued by the bankruptcy court in New York is not binding on our judges here in Detroit, Michigan. But it is strongly persuasive that, once you bring a creditor into the sphere of bankruptcy, they must stay there.

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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