If a Debt Isn’t Scheduled in a Chapter 7, Is it Discharged? (Probably)

Growing up, my dad liked the saying, “If a tree falls in the woods and nobody is there to hear it, does it make noise?” (Actually, he used the alternate version, involving a bear, bear excrement, and the resulting odors).

But, let’s get back to creditor rights talk: “If a Debt isn’t Scheduled in a Chapter 7, Is it Discharged?

I get this question all the time, from a creditor who–for whatever reason–isn’t listed as a creditor in the Bankruptcy Schedules and who may not get notice of the Bankruptcy Case.

The general thought is, if you want to discharge the debt, you have to list and send notice that creditor. This comes from 11 U.S.C. § 523 (a)(3), which says that all debts are discharged under § 727, unless those debts that are:

“…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 dischargeability 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…”

Based on the text above, it’s pretty clear, right?

Well, the Sixth Circuit Court of Appeals has very convincingly ruled otherwise, in In re Madaj, 149 F.3d 467 (6th Cir. 1998). In that case, the debtor intentionally hid the bankruptcy from the creditors (who, coincidentally, were his foster parents). They weren’t listed, weren’t warned, and, in fact, the debtors actively kept the case a secret from mom and dad.

But, nevertheless, the Bankruptcy Court noted that the case was a no-asset case, meaning no Proof of Claim deadline was ever set, such that the § 523 (a)(3) timelines and deadlines were never implicated. The Court said that, because no claim deadline was ever set in this no asset case, then it didn’t matter when the creditors learned of the Bankruptcy Case: the instant they learned about the Bankruptcy, the debt was discharged.

“Their learning of the bankruptcy after the entry of the discharge order did not transmogrify the debt into one that is excepted from discharge under some provision of the Code other than § 523(a)(3)(A).”

Once upon a time, when a creditor wasn’t listed, the debtor would file a Motion to reopen the closed bankruptcy case and then amend their Schedule F to include the debt. The Court expressly rejected that practice. Instead of imposing administrative hassle on the Clerks and counsel, the Court found that such debts–listed or unlisted–are discharged. In a no asset case, “the fact that the debts were not listed becomes irrelevant.”

So, in these situations, that sound you hear is the debt getting discharged.

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If a Debt Isn’t Scheduled in a Chapter 7, Is it Discharged?

Growing up, my dad liked the saying, “If a tree falls in the woods and nobody is there to hear it, does it make noise?” (Actually, he used the alternate version, involving a bear, bear poop, and the resulting odors).

But, let’s get back to creditor rights talk: “If a Debt isn’t Scheduled in a Chapter 7, Is it Discharged?

The general thought is, if you want to discharge the debt, you have to list and send notice that creditor. Most Debtor Bankruptcy attorneys err on the side of listing any and everybody: paid debts, unpaid debts, potential debts, everything.

This comes from 11 U.S.C. § 523 (a)(3), which says that all debts are discharged under § 727, unless those debts that are:

“…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 dischargeability 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…”

Based on the text above, it’s pretty clear, right? If it’s not listed, it’s not discharged, right?

Well, the Sixth Circuit Court of Appeals has very convincingly ruled otherwise, in In re Madaj, 149 F.3d 467 (6th Cir. 1998). In that case, the debtor intentionally hid the bankruptcy from the creditors (who, coincidentally, were his foster parents). They weren’t listed, weren’t warned, and, in fact, the debtors actively kept the case a secret from mom and dad.

But, nevertheless, the Bankruptcy Court noted that the case was a no-asset case, meaning no Proof of Claim deadline was ever set, such that the § 523 (a)(3) timelines and deadlines were never implicated. The Court said that, because no claim deadline was ever set in this no asset case, then it didn’t matter when the creditors learned of the Bankruptcy Case: the instant they learned about the Bankruptcy, the debt was discharged. Subpart (A) above never came into play, because no Proof of Claim was ever set. Heck, the Court reasoned, the creditor could file a Claim today and still be technically “timely.”

“Their learning of the bankruptcy after the entry of the discharge order did not transmogrify the debt into one that is excepted from discharge under some provision of the Code other than § 523(a)(3)(A).”

Once upon a time, when a creditor wasn’t listed, the debtor would file a Motion to reopen the closed bankruptcy case and then amend their Schedule F to include the debt. The Court expressly rejected that practice. Instead of imposing administrative hassle on the Clerks and counsel, the Court found that such debts–listed or unlisted–are discharged. In a no asset case, “the fact that the debts were not listed becomes irrelevant.”

So, in these situations, that sound you hear is the debt getting discharged.

Bankruptcy Discharge: You Only Get One Every Eight Years

Sometimes people need to hit the “reset” button more than once, even in Bankruptcy Court.

How quickly can an individual who has received a Chapter 7 discharge obtain a new Chapter 7 discharge?

The answer is in 11 U.S.C.A. § 727(a)(8), which provides that the Bankruptcy Court shall grant a discharge, unless:

(8) the debtor has been granted a discharge under this section, under section 1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition;

So, the quick answer is that you count out 8 years from the date that the individual filed the first case in which he or she received a Discharge. Note: You don’t count the 8 years from the last discharge, but, instead, from the date that the earlier case was filed.

This is why you see what some people refer to as “Chapter 20” bankruptcy cases, in which a debtor receives a discharge in Chapter 7 and then immediately (or soon thereafter) files a subsequent Chapter 13 case. The debtor doesn’t get a discharge in the Chapter 13, but can get the other benefits of Chapter 13, like stretching out the amortization of a debt that was reaffirmed in Chapter 7 or obtaining a stay from collection on liens or reaffirmed debts.

This is a change from earlier law, which set the time period between discharges using a 6 year period.

Another side issue to consider: under 11 U.S.C.A. § 1328(f)(1), the debtor in a subsequent Chapter 13 will not receive a discharge in that Chapter 13 if he or she received a discharge under 7 or 11 in a case filed under 7 or 11 during the 4 year period preceding the Chapter 13 filing.

Creditor Essentials: The Difference between a Bankruptcy Discharge and a Bankruptcy Dismissal

Just as all rivers run to the sea, all bankruptcy cases run to a bankruptcy discharge. Unless they don’t…which probably means that the case has been dismissed.

If you are a creditor, there is a big difference between a bankruptcy discharge and a bankruptcy dismissal.

A discharge means there is no (or modified) liability for the borrower’s debts, usually under 11 U.S.C. 727, 1141, or 1328.  Simply put, a “discharge” means that the debtor wins and doesn’t owe the debt any more.

A dismissal generally means that something has gone wrong in the case (such as a payment default under a Chapter 13 Plan or some failure by the Debtor to comply with the Bankruptcy Code) and, as a result, the bankruptcy case is going to prematurely end…without a discharge.  Here, the creditor wins because the debtor doesn’t get a discharge, and the debt remains due and owing.

This may be an obvious distinction, but it wasn’t to me on the first day I practiced bankruptcy law. Considering the absolutely polar-opposite results the two outcomes have for creditors, however, I learned this important lesson quickly.