What happens if a debtor in a “no asset” Chapter 7 bankruptcy case does not list dischargeable debt in their Chapter 7 petition schedules? Is the unlisted creditor’s debt discharged by the Bankruptcy Court? Can the creditor attempt to collect on that debt due to the absence of their debt in the petition?
To answer this question, we must first examine the meaning of a “no asset” Chapter 7 case. A “no asset” Chapter 7 case is one in which a Chapter 7 trustee, after conducting a 341(a) meeting of the debtor’s creditors, makes a final report to the bankruptcy court and to the U.S Trustee. See, 11 U.S.C. § 704(a)(9) (“The Trustee shall … make a final report and file a final account of the administration of the estate with the court and with the United States trustee …”). In that report, a Chapter 7 trustee certifies to the Bankruptcy Court that the Trustee has reviewed the debtor’s petition, investigated all relevant facts, and has determined that there are no assets to liquidate for the benefit of the Chapter 7 debtor’s creditors.
As a result of a Chapter 7 trustee’s report to the Bankruptcy Court of “no distribution” to a debtor’s creditors, there is no claims filing process initiated in Chapter 7 bankruptcy case. It follows that, since no claims filing process is initiated in the Chapter 7 bankruptcy case, the time for filing a claims does not, and never will, expire in a “no-assets” Chapter 7 case.
So what impact does the lack of a claims filing process in the underlying “no asset” Chapter 7 case have have on the dischargeability of a creditor’s unlisted, dichargeable debts? The Third Circuit Court of Appeals addressed this issue in Judd v. Wolfe;
Section 727(b) of the Bankruptcy Code defines the scope of a Chapter 7 debtor's discharge: “Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharged the debtor from all debts that arose before the date of the order for relief under this chapter....” 11 U.S.C. § 727(b). (Emphasis added.) As other courts have observed, “The operative word in this section is ‘all.’ ” Because section 727(b), on its face, does not create an exception for unlisted or unscheduled debts, every prepetition debt is discharged under section 727(b) subject to the provisions of section 523(a)(3). We thus turn to section 523(a)(3).
Section 523(a)(3) creates two categories of unscheduled debts: (1) those that are “of a kind specified in paragraphs (2), (4), or (6) of this subsection,” and (2) those that are not of such kind. Those debts that are not of the kind specified in paragraphs (2), (4), or (6) of section 523(a) are resolved by reference to section 523(a)(3)(A).
Section 523(a)(3)(A) excepts from discharge certain debts that were:
Neither listed nor scheduled ... in time to permit ... timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing....
Because this is a “no-asset” Chapter 7 case, the time for filing a claim has not, and never will, expire unless some exempt assets are discovered; thus, section 523(a)(3)(A) cannot be applied in Judd's circumstances. Because section 523(a)(3)(A) does not apply here, Judd's debt to Wolfe was discharged by operation of law at the time of her discharge on July 14, 1993, unless her debt to Wolfe falls under sections 523(a)(2), (4), or (6).
For most creditors, the fundamental right enjoyed in bankruptcy is the right to file a proof of claim because filing a claim is obviously necessary in order to participate in the distribution of the estate's assets. Section 523(a)(3)(A) honors this right, by excepting from discharge, debts owed to creditors who did not know about the case in time to file a claim. In a case where there are no assets to distribute, however, the right to file a proof of claim is a hollow one. An omitted creditor who would not have received anything even if he had been originally scheduled, has not been harmed by omission from the bankrupt's schedules and the lack of notice to file a proof of claim. Thus, in a no-asset Chapter 7 case where no bar date has been set, we conclude that there would be no purpose served by reopening a case to add an omitted creditor to the bankrupt's schedules. If the debt at issue is not a debt described under section 523(a)(2), (4) or (6), the debt has been discharged by virtue of section 727(b), whether or not it was listed. If, however, the debt is a debt that falls under sections 523(a)(2), (4) or (6), the debt is not discharged by virtue of section 523(a)(3)(B).
Judd v. Wolfe, 78 F.3d 110, 113–15 (3d Cir. 1996) (internal citations omitted). See, also, In re Beezley, 994 F.2d 1433, 1434 (9th Cir. 1993) (internal citations omitted) ("[Debtor]'s, however, was a no asset, no bar date Chapter 7 case. After such a case has been closed, dischargeability is unaffected by scheduling; amendment of [Debtor]'s schedules would thus have been a pointless exercise. 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 sum, reopening here in order to grant [Debtor]'s request would not have 'accord[ed] relief to' [Debtor]; thus, there was no abuse of discretion [by the Bankruptcy Court in denying the Debtor's motion to reopen the Chapter 7 case to schedule omitted debt].").
Are you a debtor that forgot to list a creditor in your Chapter 7 case?
Or are you a creditor holding a debt that was not listed by a debtor in a Chapter 7 case?
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