What happens if you miss putting a creditor on your bankruptcy schedules? In the bustle of preparing to file bankruptcy, a slip up is not uncommon.
Notice is one of the fundamental rules of bankruptcy. Everyone to be affected by a bankruptcy case gets notice. That notice provides the creditor with an opportunity to participate in the case. It all amounts to due process.
So, what if a creditor didn’t get notice?
The consequences range all the way from “nothing ” to “you lose your discharge”. In a lawyer’s favorite phrase, it depends.
Omission is no big deal
Let’s start with the plain-vanilla creditor innocently missed when the bankruptcy schedules were prepared. The Bankruptcy Code says that a creditor without notice of the bankruptcy case as one of the exceptions to the discharge. A debtor isn’t relieved of liability for
§523(a)(3)neither listed nor scheduled …. with the name, if known to the debtor, of the creditor to whom such debt is owed …
But the statute goes on: the debt of the unlisted creditor survives if the debt was incurred honestly and the creditor missed the deadline to file a proof of claim.
Case law says that if there were no assets from which claims could be paid to creditors, then notice is irrelevant. Being omitted caused no harm to the creditor The case in the 9th Circuit, which includes California, is Beezley.
The debt of the omitted creditor is discharged.
A creditor who learns unofficially of the bankruptcy in time to act is treated as though the creditor was formally noticed of the case.
Nondischargeable claims survive
When the creditor without notice asserts that his claim is non dischargeable, the claim survives, at least until a court rules on the issue.
Remember that three of the exceptions to discharge, where the debt was created by dishonesty or intentions bad acts, require that the holder of the claim seek a court determination that, in fact, his claim fits within those “bad acts” exception to discharge.
When the creditor isn’t included in the schedules, the time for bringing an adversary proceeding to exclude a debt from discharge is extended. Most courts will limit the time a creditor has after learning of the bankruptcy to bring a non dischargeability action. Just how long the creditor has is up to the judge.
Often, the problem of the missing creditor comes up when the creditor tries to collect the debt after the discharge and the debtor cries foul: My debts were discharged in bankruptcy!
The debtor may choose to reopen the bankruptcy case and get a determination about whether the debt in question is really grounded in “bad acts”.
Lienholders get mixed bag
Creditors with a lien have two kinds of rights: they may have a claim against the debtor in the debtor’s individual capacity. They also have a bundle of rights against the collateral to which their lien attaches.
Bankruptcy alone does not alter or affect a creditor’s lien rights. Liens can be affected in bankruptcy, but generally a separate motion or adversary proceeding must be filed to alter those rights, and the lien holder must get notice.
So, absent notice, a lienholder’s rights are safe.
The secured creditor’s rights to pursue the debtor on account of the debtor’s personal liability (rather than pursue the collateral) are subject to the same rules about notice as we discussed above.