Most bankruptcy attorneys have run into this situation:
A Chapter 7 client forgets to identify a specific debt to a long-forgotten creditor, a debt that for whatever reason also does not show up on that client’s credit report. It happens ALL the time.
- The Chapter 7 in this example is filed
- the trustee finds no non-exempt assets
- the debtor receives an order of discharge
- shortly thereafter, the case is closed
- The unlisted creditor never received any a written notice of the bankruptcy filing
- Later the client receives a demand for payment from the forgotten creditor and then contacts his or her bankruptcy lawyer wondering what can be done about it.
This issue came up recently for one of my clients who received a discharge over three years ago. A creditor crawled out from under their rock, and began harassing the debtor (my client) who contacted me, terrified, wondering what could be done, and scared that this debt had come back from the dead to haunt him or her.
Is the Debt Alive or Dead?
Was this client’s bankruptcy discharge also effective as to the debt that didn’t get listed in the bankruptcy schedules? Can that creditor go ahead and collect this unlisted debt from our unlucky debtor?
In the Ninth Circuit, which includes California, this question was settled by the lawsuit Beezley v. California Land Title Co.( In re Beezley ), 994 F. 2d 1433, 1434( 9th Cir. 1993 ). In Beezley, the Court held that reopening a Chapter 7 to list a previously omitted creditor would be useless, since the creditor would have received nothing from the Bankruptcy Estate in any event.
The exception would be if there were a valid basis for the creditor to have brought a non-dischargeability objection in the debtor’s Chapter 7 case based on one of the exceptions to discharge in Bankruptcy Code section 523, like some act of debtor fraud, for example. But where there would have been no assets for the trustee to liquidate and distribute, and where there are no reasons why any exception to discharge would apply, then a debt is discharged whether or not the specific debt was listed in the bankruptcy, and whether or not the creditor received a written notice of the bankruptcy filing.