Recently, I experienced a string of Chapter 13 cases that were in danger of failing within just the first few months. It turned out that the reason in each case was the same: the debtors were paying and trying to play catch-up with their utility services (Wisconsin Public Service) and couldn’t afford to make their plan payments.
The thing is, WPS should have been included in their bankruptcy case and not paid separately from the Chapter 13 Plan. In each case, the debtor never informed me that they were delinquent on their utility bills. Why WPS didn’t show up on their credit reports is a different mystery, but the point remains that a debtor needs to tell their attorney about any debts they may not have shown up on a routine credit check.
I could get into a detailed discussion about WPS and when and why their debts need to be included in bankruptcy. But I think this story illustrates a much broader issue that I find myself repeatedly having to hash out with clients. And that’s the “I don’t want to file against so-and-so” problem.
Here’s the thing, and I can’t stress this point nearly enough. Listing a debt on your bankruptcy schedules is NOT synonymous with having the debt discharged. Whether a debt is discharged depends on the nature of the debt, not whether it was disclosed.
A non-dischargeable debt is what it is. You could file bankruptcy 20 times and list your student loans on your schedules each time, and without a demonstration of hardship, those loans aren’t going away.
Similarly, someone who wishes to keep a store credit card open for future purchases does themselves no favors by omitting the creditor from their schedules. The bankruptcy discharge is good against the world. And the credit card debt is discharged, whether they were listed on schedules or not.
Stated another way, the Chapter 7 discharge is “good against the world,” including unscheduled creditors. The discharge is said to be good against the world in the sense that it applies to all unscheduled debts except those that are expressly made nondischargeable by § 523.
And listing your home mortgage or car loan does not mean you’re going to lose your house or your car. Most people get to pick and choose what secured debts they will reaffirm or surrender. Listing these creditors on schedules is not an affirmation of intent.
So if a debt will be discharged whether or not it is listed on schedules, or if a debt is non-dischargeable whether or not it is listed on schedules, then why is it is so important to list creditors on schedules?
Because no matter who the creditor is – a non-dischargeable student loan, your dischargeable credit card, or your home mortgage that you intend to reaffirm – they are all legally affected by your bankruptcy case. Your bankruptcy case automatically endows you and all of your creditors with certain rights and responsibilities.
So disclosing all debts becomes a matter of proper notice and of due process rights. Each of your creditors is entitled to be made aware of your bankruptcy so that they can act accordingly. If their debt is dischargeable, they may be entitled to object to your discharge for allegations of fraud. Although your student loans may not be discharged, your lender is still required to not make collection attempts while the bankruptcy is pending. And although you intend to reaffirm your home mortgage, the debt is technically dischargeable, so your lender needs to know to execute a reaffirmation agreement.
If your case is an “Asset Chapter 7” (non-exempt property available to the trustee to be sold for the benefit of unsecured creditors) or a Chapter 13 (which includes monthly plan payments to be redistributed among creditors), then all of your creditors have a right to know about the bankruptcy so they can file claims.
Sure, there are other reasons to list all creditors. (1) So you get the full force and benefit of your automatic stay and discharge injunction protections. (2) Because your debt to income ratio, who your creditors are, and how much your creditors are owed (regardless of class) may very well have a material impact on your case and how it is administered. (3) Because keeping unsecured debts “out of bankruptcy” usually means you’re still making payments to them, which would constitute all sorts of preference payment issues.
But mostly, it’s a due process issue. Each and every one of your creditors, regardless of your intent to pay and regardless of dischargeability, will be affected by your bankruptcy case and have a right to know that you filed for bankruptcy.