By Ryan C. Wood
A common question we hear is what happens if I forget to list a creditor in my bankruptcy case? We are all human after all and you may not even know someone out there thinks you owe them money to even list them properly in the bankruptcy petition schedules. To try and list all creditors we ask for recent statements and obtain creditor reports from all three credit bureaus. What happens if you do not list a debt is complicated though and mainly depends upon whether you have assets available to creditors. Each jurisdiction has exemptions to protect assets. If you are filing a Chapter 7 case and the value of your assets is more than the exemptions then there are assets available for the chapter 7 trustee to sell and give the money to your creditors. Your bankruptcy lawyer will discuss the exemptions available prior to filing the bankruptcy case. The majority of Chapter 7 cases have no assets available. The distinction is whether you have an asset case or no asset case.
No Asset Chapter 7 Case
In a no asset chapter 7 case the Ninth Circuit has held more or less no harm no foul. The basic idea is that if there were no assets for a creditor to be paid from then what has the creditor lost if not being listed in the case and receiving notice? The creditor has lost nothing. Furthermore, in no assets cases there is no call or request for creditors to even file a proof of claim. In the case Beezley v. Cal. Land Title Co. (In re Beezley), 994 F.2d 1433 (9th Cir. 1993) the Ninth Circuit Court of Appeals addresses this issue. In the Beezley case the debtor filed a motion to reopen the Chapter 7 case to add a creditor that was not listed. The bankruptcy court denied the motion to reopen and the Ninth Circuit Court of Appeals affirmed the decision. The Ninth Circuit explains that if the omitted debt is of a type covered by 11 U.S.C. § 523(a)(3)(A), it has already been discharged pursuant to 11 U.S.C. § 727. If the debt is of a type covered by 11 U.S.C. § 523(a)(3)(B), it has not been discharged, and is non-dischargeable. In the Beezley case the debt was covered by 11 U.S.C. § 523(a)(3)(A), and therefore discharged. There was no need to file a motion to reopen the case to add the omitted creditor. 11 U.S.C. § 523(a)(3)(B) provides that is the debt is subject to 11 U.S.C. § 523(a)(2, 4 or 6) then the deb may not be discharged. Section 523(a)(2, 4 and 6) provide for exceptions to discharge if the debt was incurred due to fraud, false pretenses, willful or malicious injury or resulted from a breach of fiduciary duty. Even though a creditor may not have timely notice of the bankruptcy case they still get a bite of the apple to argue the debt should not be discharged due to fraud, false pretenses, or due to a willful and malicious injury or breach of fiduciary duty. A creditor can still file an adversary proceeding to have the debt judged to be not discharged.
Asset Chapter 7 Case
The analysis gets more complicated if the case is an asset Chapter 7 case and a creditor was not listed and provided notice of the case. In an asset case the creditor will have lost the opportunity to receive money from the bankruptcy estate. In a recent published order, April 13, 2015, by the Ninth Circuit Court of Appeals in In re: Charles G. Mahakian, (9th Cir. 2015), the Ninth Circuit upholds the decision in Beezley under different facts. In the Mahakian case the debtor sought to file a proof of claim on behalf of a creditor that was not listed in the bankruptcy petition schedules. The point is the debtor wanted the creditor to receive money from his bankruptcy case and then discharge the unpaid balance of the debt. The creditor is arguing that it was never listed in the bankruptcy case and the debtor cannot now file a claim late on its behalf.
The Ninth Circuit Court of Appeals held the plain language of § 523(a)(3)(A) is clear. A debt is not discharged or excepted from discharge if the creditor was neither listed nor scheduled and did not otherwise know of the bankruptcy case in time to file a timely proof of claim. The debtor’s bankruptcy attorney tried to argue excusable neglect was the reason the proof of claim was not timely filed on behalf of the creditor. This argument was not successful. The Ninth Circuit explains the issue of excusable neglect under these circumstances does not have anything to do with dischargeability under Section 523(a)(3)(A). Allowing a debtor to use excusable neglect to file an untimely proof of claim would ignore the plain language of Section 523 regarding unscheduled debts.
The moral of the story is to do everything possible to list all debts and creditors in the bankruptcy schedules when the case is first filed. If the case is a no asset case there is less to worry about. But what if the case turns into an asset case as the case continues? The court in the Ninth Circuit will read the plain language of Section 523 and the debt will be excepted from discharge.
