Are Debts Dischargeable If They’re Not Listed In The Bankruptcy Papers?

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The answer to this question is a bit more involved than the question itself.

1. The Bankruptcy Code On Omitted Debts

   There is a provision in section 523(a)(3) of the Bankruptcy Code that says that one type of debt that is not dischargeable in a Chapter 7 is a debt that the debtor did not list in the bankruptcy papers in time for the creditor to:

   (a) File an adversary complaint to challenge the debt’s discharge under theories of fraud (§ 523(a)(2)), breach of fiduciary duty (§ 523(a)(4)), or willful and malicious harm to a person or property (§ 523(a)(6)) — the deadline for filing the complaint is sixty days after the date first set for the meeting of creditors under section 341(a); or

   (b) File a proof of claim to participate in any payout after liquidation of assets.

2. The In re Beezley Chapter 7 Carve-Out

However, there is a Ninth Circuit case, In re Beezley, 994 F. 2d 1433 (9th Cir. 1993), that has a special carve-out in a no-asset Chapter 7. Before getting into the facts and implications of Beezley, let’s establish a bit of vocabulary in the Chapter 7 context.

1. Some Vocabulary

In a Chapter 7 the big goal is to discharge debts without paying anything to the creditors. Since this is a big hit on the creditors, there are some limitations. One limitation is on what the debtor gets to keep. Therefore, one of the things we include in a set of Chapter 7 bankruptcy papers is a complete list of everything the debtor owns or has an interest in. The assets are divided into two categories: exempt and nonexempt. The debtor keeps the exempt assets. The Chapter 7 Trustee assigned to the case liquidates the nonexempt assets for the benefit of the creditors. We determine which assets are exempt by appealing to an appropriate exemption table. One table is for homeowners with equity in their principal residence, the other is for everyone else.

In most individual Chapter 7 cases there are no nonexempt assets. Such cases are called no-asset cases. If there are nonexempt assets available for liquidation, then the case is called an asset case.

2. The Ninth Circuit’s Reasoning

Beezley filed a no-asset Chapter 7 case, and received a discharge and the Court closed the case. A long time after the sixty-day deadline for filing the adversary complaint had passed and the Court closed the case, Beezley remembered a creditor he had inadvertently omitted. He filed a motion to reopen the case to amend his schedules to add that creditor. The Bankruptcy Court denied the motion and Beezley appealed. The Bankruptcy Appellate Panel for the Ninth Circuit affirmed the Bankruptcy Court’s ruling, and Beezley appealed to the Ninth Circuit Court of Appeals.

The Ninth Circuit affirmed the lower courts’ rulings, but added an explanation so that practitioners, debtors, and creditors could understand some important bankruptcy principles.

The Court held that since Beezley’s case was a no-asset Chapter 7, the omitted creditor was not prejudiced in its right to file a proof of claim because there was no payout to creditors.

The Court further held that if the debt was a dischargeable debt, then it was discharged, in spite of Beezley’s failure to schedule the debt. And if it was nondischargeable, it was not discharged. Moreover, reopening the case to add the creditor would not have restarted the sixty-day clock on filing the adversary complaint, so there was no point to amending the schedules.

3. A Creditor’s Possible Bootstrapping

By the way, if the creditor felt the debt should have been nondischargeable, it could have reopened the case to challenge the discharge under § 523(a)(3), under a theory of failure to schedule the debt. If the Court permitted the reopening under that theory, the creditor could then have bootstrapped into of § 523(a)(2), (4), or (6). This is because, the sixty-day time limit only applies to § 523(a)(2), (4), or (6). It does not apply to § 523(a)(3).

3. The Chapter 13 Context

Things are quite different in a Chapter 13 because the point of a Chapter 13 is to pay creditors something through the plan. Therefore, if the debtor omits a creditor in a Chapter 13, the debt will not be discharged because the creditor’s right to file a proof of claim was prejudiced by the omission.

4. The Perjury Problem

If a debtor knows of a debt and simply refuses to schedule it, that debtor is committing perjury because the debtor testifies under penalty of perjury — both in the bankruptcy papers, and at the meeting of creditors — that the debtor has listed all creditors. Perjury is an imprisonable offense. However, there is a silver lining: the debtor will be incarcerated in a federal penitentiary rather than a state one. I have never actually been in a penitentiary because I have never taken a criminal case. But I have had bankruptcy clients who had spent years in penitentiaries prior to becoming clients, and they have assured me that the food is better in federal penitentiaries.

5. My Experience

I have, on occasion, had clients who, through lack of documentation, discovered that there was a debt they failed to list. If the case was a no-asset Chapter 7, I write the creditor an In re Beezley letter.

If the case was an asset Chapter 7, or a Chapter 13, the debt was not discharged.

In sum, you must list all your debts, especially if there are assets to be liquidated, or if there is a plan of reorganization through which creditors are being paid. If you don’t, then the debt will not be discharged.

I used the bootstrapping strategy once when I represented a creditor. The debt hadn’t been listed, but the creditor felt that the debt had been incurred through fraud. However, the 60-day window had already passed by the time the creditor even found out about the bankruptcy case, so we couldn’t do the adversary proceeding under the fraud exception to discharge. Instead, we used the failure to list the debt in the bankruptcy papers exception, and that does not have that 60-day deadline. As a result, we were able to have a determination of nondischargeability and bootstrap ourselves into the fraud analysis.

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