Often referred to as the “holy grail” of bankruptcy law, a bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. Because of the sweeping relief, a debtor must follow numerous requirements, among the most important disclosing all current or potential claims against the debtor or the bankruptcy estate. Failure of a debtor to be completely forthright on its official bankruptcy claim schedule will, more often than not, result in the Bankruptcy Court denying the debtor’s discharge.
Under the Bankruptcy Code, an individual debtor may not discharge debts which were not scheduled in time to permit a timely filing of a proof of claim – unless such creditor had notice or actual knowledge of the case in time for such timely filing.
The crux of the requirement that a debtor schedule all potential claims can be traced back to basic due process considerations. As the Bankruptcy Court for the Southern District of Florida succinctly stated, “[t]he primary purpose of this discharge exception is fairness to those creditors who, through no fault of their own, were prejudiced by not having the opportunity to protect their rights and assert their interests.” If the creditor had no knowledge of the bankruptcy proceeding, it could not raise a claim or assert its right thereto.
Thus, if a creditor had notice or actual knowledge of the debtor’s bankruptcy case prior to the deadline for filing a dischargeability complaint, the debtor may be entitled to a determination that the debt is dischargeable. On the other hand, if the creditor did not have notice or actual knowledge of the debtor’s bankruptcy case before the deadline for filing a dischargeability complaint, the Court must evaluate the reasons why the debt was neither listed nor scheduled on the Debtor’s schedules in time to permit the filing of a complaint before that date.
Importantly, if a creditor can satisfy the threshold burden of showing that its debt was not properly scheduled, the far more fact intensive burden shifts to the debtor to show that the creditor had actual notice or knowledge of the bankruptcy case in time to protect its rights.
In our next post we will discuss the prejudicial effect of a debtor’s intentional failure to list or schedule a debt.