Experience teaches that not every loan recipient will repay the lender in a timely fashion. Lenders commonly make use of third-party collection agencies when a loan falls significantly into arrears. In light of a recent decision by the 9th Circuit Bankruptcy Appellate Panel, however, it is more critical than ever for lenders to be cognizant of the letter of the law when it comes to interacting with a debtor who has filed for bankruptcy or received a discharge of debt in a bankruptcy case. A recent Nevada Bankruptcy Court decision to award $119,000 in sanctions against a debt servicer was affirmed on appeal by a unanimous three-judge Bankruptcy Appellate Panel demonstrating the significant legal and financial repercussions that can occur when a lack of human oversight in the collection process leads to litigation in which the lender/collector becomes the judgment debtor/payor. More significantly for future lender exposure liability, however, was that part of the Appellate Court’s opinion which reversed and remanded the Nevada Bankruptcy Court’s determination that sitting as a Bankruptcy Court it could not award punitive or exemplary damages for a lender’s knowing violation of the Bankruptcy Code Section 524 Discharge Injunction.
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