30 Jul What Can You Do If Your Debtor Received (Or Is About to Receive) a Bankruptcy Discharge and Did Not Name You as a Creditor?

In our latest series of blogs concerning bankruptcy debtors, we discussed how you and your company can legally pursue a debtor in bankruptcy to collect on your company’s debt, and how to maximize on those collection efforts if your debtor has improperly transferred or hidden assets before an impending bankruptcy or shortly after.   But what if your debtor is about to (or already did) receive a bankruptcy discharge without naming you or your company as a creditor in the bankruptcy proceeding?

Depending on whether your debtor had remaining assets in its bankruptcy case, and whether the omission was “innocent”, the omitted debt is likely “nondischargeable” if you act fast to notify the court.  Also, if your debtor was untruthful or committed fraud in relation to your debt, you may even be able to reopen the debtor’s bankruptcy case to have the bankruptcy court administer your claim and even deny the debtor a bankruptcy discharge altogether.

What Debt is Dischargeable and Nondischargeable in Bankruptcy?

One of the primary reasons a debtor files for bankruptcy is to obtain what is called a “bankruptcy discharge”, which extinguishes all of the debtor’s debt and relieves the debtor from having to pay back most of its creditors.  In a Chapter 7 case, the discharge occurs upon an order of the bankruptcy court.  In Chapter 11 cases, the discharge occurs upon confirmation of a plan (other than a liquidating plan).

There are certain debts however that the debtor cannot extinguish or get rid of in bankruptcy, called “nondischargeable” debt, which means these debts usually remain intact even after the debtor obtains a discharge:

• Debts incurred after the debtor files for bankruptcy
• Secured loans (unless the debtor gives the property back or signs a reclamation agreement)
• Unsecured Priority Debts (i.e., domestic support obligations, income taxes, other government debts (such as fines and penalties)
• Student loans (unless the debtor can demonstrate he or she has an “undue hardship”; a disability that prevents the debtor from working can qualify as an undue hardship)
• Debt resulting from fraud, false pretenses, or false representation
  • A debt incurred based on a false written statement of the debtor’s financial condition
  • A debt incurred by fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny
  • A debt incurred based on a fraud other than with respect to the debtor’s financial condition
• Certain property taxes
• Taxes withheld from employee wages
• Debts determined nondischargeable in a previous bankruptcy
• Some condominium dues and fees
• Loans owed to pension or retirement plans
• Debts owed as a result of violating securities laws and regulations
• Debts for willful and malicious injury (such as purposefully stabbing someone), and
• Money owed as a result of wrongful death or personal injury to another caused by operating a car, boat , airplane , or other vehicle under the influence of alcohol or drugs

Also, if the debtor does not list your debt, and the debtor’s case is an “asset case” (i.e., one where there is money to distribute to creditors), the omitted debt is nondischargeable unless you had actual notice or knowledge of the bankruptcy filing.  Even in no asset cases, some courts have found certain debts nondischargeable if the debtor’s failure to list the debt was not “innocent.”  

For some of these types of debts, the creditor would need to file an adversary complaint in the bankruptcy case to have the bankruptcy court determine the dischargeability of the particular debt or deny a debtor its discharge under a strict time limit of 60 days after the first date set for the meeting of creditors.

Denial of Discharge and Motion to Reopen Bankruptcy  

In addition to the general nondischargeability of nondisclosed debts in a bankruptcy case with assets, and the certain types of debts listed above, a debtor will be denied a discharge if the debtor has committed any of the acts listed below:

• Transferred property within one year of bankruptcy with actual intent to hinder, delay or defraud
• Made a false oath in connection with the bankruptcy
• Received a discharge in an earlier case commenced within 8 years before the instant bankruptcy case
• Received a Chapter 12 or 13 discharge in an earlier case commenced within six years before the instant case if creditors did not receive a 70% payment in a good faith case (or a 100% payout otherwise)

And even if the debtor obtained a discharge, your company could move the bankruptcy court in certain cases to reopen the bankruptcy case.  The Bankruptcy Code says a case may be reopened “to administer assets, to accord relief to the debtor, or for other cause.”  So if you or your company can prove that the debtor has assets “of such probability, administrability, and substance” in existence so as to “make it unreasonable under all the circumstances for the court not to deal with them,” the court must reopen the case.  This allows your company as a creditor to request a court to reopen the bankruptcy case to determine the dischargeability of an undisclosed debt you are owed, or to determine whether you or your company would have been entitled to share in the bankruptcy distribution, if the debtor had properly listed you as one of its creditors in the bankruptcy.

Also, your company could move to reopen the bankruptcy case “for cause”, so that it can bring fraud-based nondischargeability or denial-of-discharge claims.  Whether “cause” exists to reopen a closed bankruptcy case in this circumstance is an equitable matter, and the court, in ruling on motion to reopen on “for cause” theory, should consider whether any of the parties involved in the bankruptcy case would suffer a legal fraud if the case were not reopened.  Courts generally consider a number of factors in determining whether to reopen a case:

• The length of time that the case was closed
• Whether a nonbankruptcy forum, such as state court, has the ability to determine the issue sought to be posed by the debtor
• Whether prior litigation in bankruptcy court implicitly determined that the state court would be the appropriate forum to determine the rights, post-bankruptcy, of the parties
• Whether any parties would be prejudiced were the case reopened or not reopened
• The extent of the benefit which the debtor seeks to achieve by reopening; and
• Whether it is clear at the outset that the debtor would not be entitled to any relief after the case were reopened.

A bankruptcy court could however refuse to reopen a case if reopening it would not afford the moving party any relief or prevent the estate from realizing the value of the claim for the benefit of creditors.

If you and your company are unsure as to whether a debt owed to you is nondischargeable, or whether you should file a motion to reopen your debtor’s bankruptcy, call Edwards Law today to discuss your options, the first consultation is always free.