You Must List All Debts In Any Bankruptcy Case

Do I have to list debts I owe to my mother and friends if I intend to repay them?

Yes, you do.  Or else your entire discharge can be permanently denied.

At least in the 7th Circuit judicial district (Indiana, Illinois, Wisconsin).

The recent decision by the 7th Circuit Court of Appeals in In re Sofia Katsman, illustrates this well.

You Cannot Pick And Choose Who Or What To List In Bankruptcy Papers

Ms. Katsman filed a Chapter 7 bankruptcy case.

As is required in all bankruptcy cases, she also filed a schedule (list) of people and entities to whom she owed a debt (these are called “creditors”).

However, Ms. Katsman intentionally omitted 4 friends and family members to whom she owed money because, she testified, she hoped to repay those debts and, therefore, did not consider them creditors.

The failure to list these creditors would not have made any difference to the outcome of her case.  In other words, she would have received a discharge of her debts regardless.

But see how the appeals court ruled below.

Bankruptcy Papers are Signed Under Penalty of Perjury

When one files a bankruptcy case, all the schedules and information are signed under penalty of perjury.  This is important.

Ms. Katsman’s ex-son-in-law, who was a creditor and was omitted by Ms. Katsman, filed a Complaint objecting to her discharge on the basis that when Ms. Katsman signed her bankruptcy papers under penalty of perjury, she made a “false oath or account” by representing that, to the best of her knowledge, she had listed all of her creditors.

Failure to do so is grounds for denial of discharge under 11 U.S.C. 727(a)(4).

The bankruptcy judge found that this was a “no harm, no foul” situation and denied the objection.  But on appeal, the 7th Circuit reversed and denied Ms. Katsman her entire discharge.  (i.e. NONE of her debts were discharged)

Denial of Discharge In Bankruptcy Is Permanent

Once debts in a Chapter 7 bankruptcy case are denied discharge, they can never be discharged in a subsequent Chapter 7 bankruptcy case, and probably not under any Chapter.

It is worth noting that the appeals court was aware that Ms. Katsman did not speak English well and did not understand what the term “creditor” meant, but it pointed out that she had a competent bankruptcy attorney whom she could and should have asked whether it was appropriate to omit certain people.

Most of my clients don’t want to list relatives because they are embarrassed and don’t want them to find out about their bankruptcy filing.

That is understandable.  But you cannot pick and choose which debts you list on your bankruptcy papers.

 Would This Happen in My Case?

Admittedly, the Katsman decision is rare.  It requires someone to actually object, and then spend the resources to litigate the objection.  And it takes a Judge (or judges) willing to make such a ruling.

In the Ninth Circuit (all the west coast states plus Arizona, Nevada, Colorado, Montana and a few others) we have a binding court decision called In re Beezley which holds that in a Chapter 7 case where no assets are being liquidated and disbursed by the Trustee, then a failure to list a creditor does not affect the discharge of that debt.

It is highly unlikely that in a No-Asset Chapter 7 Case  a court in the 9th Circuit would make the distinction between an intentionally omitted debt and one that was inadvertent, so the chances of losing your entire discharge like Ms. Katsman is very unlikely here (even the Katsman appeals court admits this by stating that if it is immaterial to the outcome, such as with trivial amounts owed, then it wouldn’t matter if they were omitted).

But that’s not really the point.  The law requires all creditors to be listed, and that includes relatives and friends and others whom you intend to repay.

Sometimes no-asset cases can become asset cases (for example, if the value of your house is higher than you thought, and there are insufficient exemptions to protect it).  If that happens, then you only get discharged from the debts you actually listed, and a court could determine that it is a material omission to fail to list all your creditors and your entire discharge could be denied (and you lose your house on top of it all!).

Clearly the best advice is to list everyone and every thing to whom you owe a debt.  It’s impossible otherwise to sign your bankruptcy papers under penalty of perjury without committing perjury.

Image Courtesy of Phil Gwinn