BANKRUPTCY CORNER
Unscheduled Claims May Not Always be Excepted from Discharge
JASON S . RIGOLI
Generally , the key to success for debtors in bankruptcy is disclosure , disclosure , disclosure . Debtors are required to disclose all assets and debts , income , expenses , certain transfers , etc ., in the schedules and statement of financial affairs filed with the bankruptcy petition . These disclosures , among other factors , allow eligible debtors to obtaining a discharge . See 11 U . S . C . §§ 727 , 1141 ( d ), 1192 , 1228 , and 1328 .
Exceptions to discharge are set forth in 11 U . S . C . § 523 . One such exception from discharge is for any debt that a debtor fails to schedule unless the creditor possessed actual knowledge of the case to timely file a proof of claim . 11 U . S . C . § 523 ( a )( 3 ). Not every unscheduled claim is automatically excepted from discharge .
A . Unscheduled Creditor with Actual Notice or Knowledge of a Bankruptcy Case will be Discharged
An unscheduled creditor with actual knowledge of a bankruptcy case cannot sit on its hands and do nothing and be excepted from discharge . 11 U . S . C . § 523 ( a )
( 3 ). See In re Alton , 837 F . 2d 457 , 460-61 ( 11th Cir . 1988 ), abrogated on other grounds .
B . Unscheduled Creditor without Timely Knowledge or Notice of the Bankruptcy Case
The other scenario involves creditors without actual knowledge or notice of the bankruptcy case . In this scenario the debt may still be discharged .
First , in “ no asset ” chapter 7 bankruptcy cases an unscheduled claim , other than a claim that could be separately excepted from discharge under § 523 ( a )( 2 ), ( 4 ), or ( 6 ), would be discharged because the creditor would never be prevented from timely filing a proof of claim . See Bellavia v . Simonetti ( In re Bellavia ), Case No . 96-22919-BKC- RBR , Chapter 7 , Adv . No . 06-01344-RBR-A , 2007 Bankr . LEXIS 2491 at * 9-10 , 2007 WL 2083604 ( Bankr . S . D . Fla . Jul . 18 , 2007 ) ( internal citations omitted ).
The second scenario involves chapter 7 asset cases . There is some disagreement to how this exception in § 523 ( a )( 3 )( A ) is applied as it relates to the phrase “ in time to be paid .” 11 U . S . C . § 523 ( a )( 3 )( A ). There are two approaches : ( i ) the plain language approach : and ( ii ) distribution approach , which can be summarized as follows :
Cases following the plain language approach point to the language of § 523 ( a )( 3 ), which does not on its face differentiate between timely filed claims and tardily filed claims that share equally in the distribution of the bankruptcy estate . According to these courts , § 523 ( a )( 3 ) would make a debt nondischargeable even if the creditor had knowledge in time to file a tardy proof of claim and fully participate in the distribution under § 726 ( a )( 2 )( C ). Courts following the plain language approach reason that to hold otherwise would render the timely language in § 523 ( a )( 3 ) meaningless .
By contrast , courts following the distribution approach take a holistic view and hold that in chapter 7 cases , § 523 ( a )( 3 ) must be read in conjunction with § 726 ( a )( 2 )( C ). These courts start with the premise that the central purpose of the Bankruptcy Code is to allow the debtor to reorder his or her affairs and enjoy a fresh start . In order to promote this central purpose , exceptions to discharge and § 523 ( a ) must be narrowly construed . While a creditor who has timely knowledge of a bankruptcy has many rights , including the right to question the debtor at the creditors ' meeting , § 523 ( a )( 3 ) is only concerned with the ability to file a proof of claim .
Creative Enters . HK v . Simmons ( In re
Simmons ), 2021 Bankr . LEXIS 2302 at * 4-5 ( Bankr . M . D . Fla . Aug . 24 , 2021 ) ( quoting In re Snyder , 544 B . R . 905 , 909 ( Bankr . M . D . Fla . 2016 )).
The impact for both debtors and creditor in chapter 7 asset cases is substantial where there is no binding 11th Circuit precedent and a subsequent dispute over whether the unscheduled claim may have been discharged is unsettled .
This article was submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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