August 2015 – Huckabee Law PLLC

Unscheduled Debts in Bankruptcy

11 U.S.C. Section 523 provides an exception to discharge for a debt:

(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—
(A)
if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or
(B)
if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dis¬chargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;

In a chapter 7 bankruptcy case, a debtor’s failure to list a debt on the schedules does not prevent it from being discharged, unless (1) a deadline was set for creditors to file proofs of claim and the creditor did not have actual knowledge of the bankruptcy case in time to file a proof of claim by the deadline or (2) the creditor had grounds (for example fraud) to object to the dischargeability of the debt and did not have actual knowledge of the bankruptcy case in time to file the objection by the deadline to do so. Whether the creditor was listed in the schedules or received formal notice of the bankruptcy is not the determining factor. In re Cerrudo, 214 B.R. 500 (Bkcy.N.Dist .Okl. 1997).

The rationale of the Cerrudo holding is that, in a chapter 7 bankruptcy case, no deadline is initially set for creditors to file proofs of claim, and, unless a deadline is later set at the request of the trustee because he has decided to administer some assets, no deadline is ever set. Therefore, in a “no-asset” chapter 7 case, it never becomes too late for a creditor to file a “timely” proof of claim.

The Cerrudo decision holds that a bankruptcy court therefore will not reopen a chapter 7 bankruptcy case for the purpose of amending the schedules to add a debt. Whether the debt is scheduled is not relevant.

The result would be different in a chapter 13 case, because a deadline to file proofs of claim is set at the beginning of every chapter 13 case. In a chapter 13 case, if the creditor does not have actual knowledge of the bankruptcy case in time to file a timely proof of claim, then the debt is excluded from the discharge.

The “actual knowledge of the case” required by Section 523(a)(3)(B) does not require actual receipt of the official bankruptcy notice, and it does not require knowledge of the deadline to file. The key word is “case”. Actual knowledge that the debtor has filed bankruptcy is all that this section requires, as long as the knowledge is received in time for the creditor to have a chance to check the bankruptcy court for deadlines and to file a dischargeability objection within the deadline. In re Walker, 927 F.2d 1138, 1144-45 (10th Cir. 1991).

Creditors who prove that they did not receive timely knowledge of the bankruptcy case under 11 U.S.C. Section 523(a)(3)(B) do not receive an automatic exception to discharge; rather, they receive an opportunity to file their objection to dischargeability after the original deadline. In re Schicke, 290 B.R. 792, 799 (10th Circuit B.A.P. 2003).

Effect of Closing of Bankruptcy Case

When a bankruptcy case is finished, the court enters a Final Decree stating that the case is closed. In the U.S. Bankruptcy Court for the Northern District of Oklahoma, the Final Decree is not a document; it is just words on the court’s docket sheet.

After the case is closed, nothing more will happen in the case. It is officially ended.

That order is different from the “discharge” order that the debtor received earlier, which stated that his dischargeable debts were discharged (wiped out).

The closing of the case means that the trustee has finished his work in the case. In bankruptcy jargon, the case has been “fully administered.” 11 U.S.C. Section 350. If the trustee sold any of the debtor’s assets, then he filed a report explaining how he distributed the money, and the court approved the report. If he did not sell any assets, then he filed a “no-asset” report.

Unless the court orders otherwise, the closing of the case causes all assets that the debtor listed on his bankruptcy schedules to revert to being owned by the debtor, even if those assets were not scheduled as “exempt”. 11 U.S.C. Section 554(c). For example, if the debtor owned an old boat and listed it on the schedules and the trustee did not sell it even though he had a right to do so, then the debtor now owns it again and is free to do with it as he pleases.

Very occasionally, bankruptcy cases have to be “reopened”. Bankruptcy Rule 5010. The most common reason for reopening is that the debtor failed to list an asset in the bankruptcy schedules. The most common asset that a debtor omits is real estate that someone (usually parents) had deeded into the debtor’s name before the bankruptcy was filed without telling the debtor.

If the debtor later discovers a debt that he forgot to list in his bankruptcy schedules, that does not mean that his bankruptcy case will be reopened. If he discover such a debt, he should immediately contact his attorney to discuss what needs to be done. In some situations, he will be stuck with the omitted debt. In most situations, he will not be, although he might need some minor legal services to convince the creditor.