IRS Sanctioned for Willful Violation of Discharge Order

Fresh Start Of bankruptcy

Bankruptcy provides the debtor with a fresh start. Continued collection efforts after discharge will be punished by the court.When Creditors Ignore the Bankruptcy Discharge

The Bankruptcy Discharge Applies Even To The Federal Government

Creditors who attempt to collect on debts that have been discharged in bankruptcy often find themselves in serious hot water with the Bankruptcy Court.  Bankruptcy judges take the discharge order very seriously and will dish out punishment to those who ignore its prohibitions against continued collection efforts. As Nebraska bankruptcy attorney Burke Smith said in his post When Creditors Come Calling After Your Bankruptcy Discharge:

If you listed a debt and you received a discharge, then you are no longer responsible or liable for that debt. Most people think that that means no more telephone calls, dunning letters or lawsuits from people trying to collect on that debt. For the most part that is usually the case, however there are many creditors and third party debt buyers who choose to ignore this very basic tenet of bankruptcy law.

In Re Kovacs: the IRS Willfully Violates the Discharge Order

For those consumers who have had the misfortune of dealing with the IRS collection machine, it probably comes as no surprise that the IRS frequently chooses to ignore a bankruptcy discharge. However, a recent case from Wisconsin reminds us that even the mighty IRS is prohibited from contacting a debtor who has discharged taxes by filing for bankruptcy.

In In Re Kovacs, the IRS mistakenly claimed that the debtor owed taxes that had been discharged in her recent bankruptcy filing. the IRS took approximately one year and 9 months to discover its error and failed to respond to the debtors claim for an award of attorney’s fees. The IRS then waited another year and a half until admitting that it had violated the discharge order on the eve of trial in the adversary case. In awarding $3,740 in damages the court found that the IRS had intentionally and willfully ignored the discharge order and that an ostensible defense of “good faith” would not stand. Although it took a number of years for the debtor to prevail, eventually with the help of a good bankruptcy attorney she was able to show that the discharge of debts in bankruptcy applies to even the most powerful of creditors.

Lessons From In Re Kovacs

If you have filed for bankruptcy and continue to receive collection calls or letters, make sure your bankruptcy attorney knows about it. In many cases, sending a letter with a copy of the discharge order attached is all that is required to make the creditor go away. However, as In Re Kovacs demonstrates, in some cases it will be necessary to fight a little bit harder to make sure that your decision to start over financially is being honored as it should be.

Image credit: JWagoner Photography Flickr

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