If I Did Not Include A Debt In The Original Bankruptcy, Can I Add The Debt In Later To Be Discharged?

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If your case is still pending, the federal rules of bankruptcy procedure permit you to amend your schedules to add creditors. Once your case has been closed, you cannot reopen it to add creditors.

According to section 523(a)(3) of the Bankruptcy Code, one kind of debt that’s not dischargeable is a debt that you didn’t list in your bankruptcy papers in time for the creditor to do one (or some combination) of two things.

The first thing that the creditor is supposed to be allowed to do is file a proof of claim, which is the way that the creditor gets added to the list of creditors who get paid out of the assets of the bankruptcy estate. For example, if you have a Chapter 13 with a plan of reorganization to pay creditors but you didn’t list that particular creditor, then the creditor never got an opportunity to file a proof of claim in the case and, therefore, never got a chance to get paid through the plan. That creditor was prejudiced by not having been listed.

The second thing that the creditor is supposed to be allowed to do is challenge the discharge of that debt under one or some combination of theories of fraud, breach of fiduciary duty, or willful and malicious harm to a person or property. If you didn’t list the creditor, it never got notice of your filing, which means it never got a chance to challenge the discharge of that particular debt.

As a result, Section 523(a)(3) of the Bankruptcy Code excludes from discharge a debt you didn’t list in time for the creditor to either file a proof of claim, or to challenge the discharge of that particular debt under one or some combination of those three theories.

However, there is a Ninth Circuit Court of Appeals case called In re Beezley that provides a carve-out to this particular provision.

Beezley filed a Chapter 7 bankruptcy with the goal of discharging his debts without paying anything to the creditors. Beezley’s Chapter 7 was a no-asset case, meaning there were no nonexempt assets for the Chapter 7 trustee to liquidate and have money to distribute to the creditors. The Court granted Beezley a discharge and closed the case. Sometime later, Beezley realized that he forgot to list one of his creditors. He filed a motion to reopen his case so he could amend his schedules to list that omitted creditor. The Bankruptcy Court denied the motion.

Beezley appealed, and his case bubbled up to the Ninth Circuit Court of Appeals. The Ninth Circuit agreed with the bankruptcy judge, but added an explanation so that people in the future would understand why adding an omitted creditor after the case has been closed is not a valid reason to reopen the bankruptcy case.

With regard to the filing of a proof of claim, the Court held that since the case was a no-asset case, the creditor was not prejudiced by the filing omission. Filing the proof of claim would have accomplished nothing since there were no assets that were liquidated by the Chapter 7 trustee, so there was no payout to creditors.

In addition, the Ninth Circuit held that amending the schedules to add the creditor would not have resurrected the creditor’s right to challenge the discharge of the debt under theories of fraud, breach of fiduciary duty, or willful and malicious harm. This is because the creditor must initiate the challenge to discharge no later than sixty days after the date first set for the meeting of creditors under Section 341(a) of the Bankruptcy Code. As that sixty-day bar date had long since passed, and couldn’t be resurrected, amending the schedules was pointless.

Finally, the Ninth Circuit held that in a no-asset Chapter 7, if the debt would have been discharged, then it was discharged, and if the debt wouldn’t have been discharged, then it was not discharged.

That still raises the question: “What if I’m the creditor in a no-asset case and I really think I could have won due to fraud?” The 60-day window has passed, so you can’t file the adversary to challenge the discharge of the debt under a theory of fraud. You could, however, file an adversary under a theory that the debtor didn’t list the debt in time for you to do this. In that case, you wouldn’t be appealing to the fraud discharge exception, you’d be appealing to the failure to list the debt. That type of adversary proceeding isn’t subject to the 60-day bar associated with challenges to discharge under theories of fraud, breach of fiduciary duty, or willful and malicious harm. You could, therefore, bootstrap into a determination that the debt would not have been discharged had it been scheduled and, therefore, it was not discharged.

Can a Bankruptcy Discharge Be Revoked?

Within one year after the discharge, a party can seek to have the discharge revoked. Doing so has to be based on some kind of fraud on the court. The entity seeking to have the discharge revoked— whether the U.S. Trustee’s Office or a creditor—also has to establish that it didn’t know about this problem at the time of the discharge and only learned about it afterwards.

In this situation, the creditor, the U.S. Trustee’s Office, or even the Chapter Trustee (if there is one) can initiate an adversary proceeding to have the discharge that’s already been entered revoked. However, doing so is an uphill battle because the plaintiff has to convince the bankruptcy judge that it didn’t know about the reason for revocation, that the reason is sufficiently serious to warrant having the discharge revoked. While it doesn’t happen very often, it is possible to have a discharge revoked.

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