In the 1933 case Local Loan Co. v. Hunt, the U.S Supreme Court ruled in favor of Hunt, establishing that a discharged debt cannot be pursued even if it is secured by a pledge of collateral property. The dispute began when Mr. Hunt borrowed money from Local Loan Co., providing his salary as security for repayment under Illinois law which allowed wage assignments to secure debts. After declaring bankruptcy and receiving discharge, he continued working but Local Loan Co still collected payments from his wages arguing that they had rights to them due to their previous agreement before bankruptcy was declared. The court held that such an action violated the Bankruptcy Act's purpose - giving debtors a fresh start unburdened by past debts - because it permitted creditors to continue collecting on discharged debts indirectly through pledged collateral rather than directly pursuing payment of the debt itself.

In the dissenting opinion for Local Loan Co. v. Hunt, Justice McReynolds disagreed with the majority's interpretation of Section 16 of the Bankruptcy Act and its application to this case. He argued that a discharged bankrupt should not be allowed to use bankruptcy proceedings as a means to avoid paying debts incurred through fraud or misrepresentation, which he believed was happening in this case. The justice felt that allowing such an action would undermine faith in business transactions and contracts, leading potentially to economic instability. Furthermore, he expressed concern about potential misuse of bankruptcy laws by dishonest debtors seeking unjust enrichment at their creditors' expense.