Everyone Has Assets

Oftentimes, when discussing assets with my clients, I am interrupted by my client with something along the lines of…
“I don’t have any assets.”
Yes, you do.
Everyone has assets.  Some people have much more in assets than other people do.  But unless you’re living a truly nomadic lifestyle in a nudist colony (in which case, you’re probably not consulting a bankruptcy attorney) – you have some assets.
Here are a few very important things to remember…

  1. The term “assets” is an extremely broad term that covers a lot of stuff.
  2. Just because an asset has an extremely low value doesn’t mean it’s not an asset.  Nor does it mean that its existence doesn’t have to be disclosed as an asset.
  3. Just because you disclose an asset on your bankruptcy schedules doesn’t mean you’re going to lose an asset.
  4. Whether someone has assets or not is a different question from whether someone has positive net worth (the value of assets exceeding one’s debts) or negative net worth (the value of assets worth less than the person’s liabilities).
Let’s focus on the first and second points.  How I know that every client of mine has at least some assets is that in my career, I have never met a completely naked client.  At the very least – someone who owns little else is going to own the shirt on his back.
Many people erroneously believe that the term “asset” refers to real estate and motor vehicles.  Indeed, real estate and motor vehicles are the two most common assets people may own of substantial value.  Moreoever, these are the two most common assets that are associated with formal ownership documentation (by way of deeds and titles).
Ironically, you may hold more equity in your household goods (which seldom are subject to liens) than your home or vehicle (the value of which may be wholly encumbered by a mortgage or auto loan).  Which brings us to another point…
Just because a bank holds a note against your home or car, it does not mean that you don’t own your home or car.  You do own them; and you have the rights and responsibilities to those assets as any other owner does, as compared to someone else who may lease or own his home or car.  A lien merely provides a legal remedy to the holder of a debt to take ownership away from you in the event of a default.
Household items (things like furniture, appliances, clothing, etc.) tend to be the lowest-valued assets that people commonly own.  As with vehicles, the value of household items depreciates dramatically the moment it leaves the store you bought it from – as anyone who has ever tried to make a fortune at a rummage sale can tell you.  That being said – not all household items are of low value.  Certain assets may appreciate with age – such an antiques, collectibles, firearms, and jewelry.  On the opposite end of the spectrum, even the pens, staplers, and this thumbtack sitting on my desk, the groceries in my kitchen, and the cleaning supplies in my linen closet are assets (though nobody in their right mind would go through the trouble of itemizing them all – this is where a broad category of “all other miscellaneous stuff” comes in handy on the bankruptcy schedules.
Pets are an asset.  Again, usually not a very valuable asset, and not an asset that any trustee would ever take an interest in.  But they are an asset and must be disclosed.  Sentimental value is irrelevant in bankruptcy.  As with all of your assets, what we are concerned with is a simple question:
If the trustee hypothetically sold this asset to a third party – how much could the trustee sell it for?

It doesn’t mean that the trustee will sell an asset, but this is the hypothetical we use to determine what your stuff is worth.
Bank accounts, retirement accounts, life insurance policies with a cash value, stocks, bonds, and actual cash and coin are all examples of “liquid assets”.  Liquid assets can quickly and easily be converted to cash with little or no change in value.  Almost everyone has some form of liquid asset, even if it’s just a crumpled up $1 bill in their pocket, or spare change in their seat cushions.
Some assets might not necessarily be in your possession.  For example, you might be storing something you own at a friend’s house.  Location and custody are irrelevant when it comes to disclosure requirements.
Other assets might only be “interests” or “rights” to some “thing of value”.  For example, you might own an interest in a patent or copyright.  Maybe you are part owner of a corporation.
Other assets might not even be realized yet – they won’t come into your possession for perhaps weeks, months, maybe even years down the road – but your right to them exists presently.  These are called “contingent” or “future” interests.
Probably the most common example is the right to a tax refund.  Let’s say that it is March 14, 2016.  Roughly 20% of 2016 has already passed, and you’ve paid in money to the government for taxes.  At the end of the year, you’ll file a tax return, claim a tax refund, and let’s say you get $2,000 back.  Even though you won’t get that tax refund until a year from now, you are entitled to $400 of that refund right now – at this point in the calendar.
Other common examples of contingent or future interest includes rights to an inheritance, claims against third parties for injuries or contract breaches, and so forth.
Although the nature of an asset (it’s value, location, or contingent status) does not change whether or not you are required to disclose its asset, the nature of an asset may play a factor in determining whether a trustee will pursue an asset (not withstanding any exemptions you may be entitled to).
Let’s take two examples.
Just to keep things simple – let’s pretend that the only asset you have is $10,000 in cold hard cash.  $10,000 is liquid, and easy for a trustee to distribute to creditors.  You also only have $8,000 in debt, so if the trustee could go after the cash, he could pay all of your creditors in full.  However, you’re entitled to a $12,000 exemption that will protect your cash.  It doesn’t matter how you came by the $10k, what you intend to spend it on, where it’s located, or what denominations of currency they exist in.  They’re exempt, and therefore, the trustee can’t touch it.
But let’s say you have a lawsuit against a restaurant for a slip-and-fall injury you suffered because their staff neglected to remove ice from their sidewalk.  Your attorney is confident that you will win a $50,000 award.  You have $120,000 in debt.  You are only entitled to exempt say $30,000 of it, leaving $20,000 exposed to the trustee for the benefit of your creditors.  Here’s the catch: the restaurant that you’re suing is a big corporation with access to a legal army, and while they may ultimately lose the lawsuit, they’re going to drag the litigation out as long as possible and bury your lawyer in paperwork.  Does the trustee pursue the $20k?  Probably not.  (1) The trustee may have to wait years to recover the asset.  (2) Part of the $50k you win will get eaten up by your own attorney’s legal fees, diminishing the $20k available to the trustee.  (3) By the time the trustee does recover the non-exempt portions, because of how much you have in debt and the costs of administration, each creditor is likely to get less than 10% of their claim back.
In another example (okay, so I lied – three), let’s say the trustee’s interests are in tangible things – real estate, vehicles, or even household items.  Things that are not liquid.  Things that must first be sold on the open market and converted into cash.  That requires time.  That requires hiring a professional (a realtor, an auctioneer).  That may require extra legwork like transporting the assets or taking an inventory.  All of these things are costs of sale and diminish the “on paper” value of an asset, making non-liquid assets much less desirable by trustees.
To summarize, an asset is any thing or right of claim of value – regardless of how little or great that value is, regardless of the thing’s location, and regardless of when you may actually come to possess that value.

Oh, and one final point.  You cannot claim an exemption on an asset you have not disclosed.  So your best bet to protecting your assets is to disclose them to your attorney.  If you don’t and the asset is discovered (which is a lot easier than most people would guess), you’ll lose it.  On the other hand, if your attorney knows about an asset, he can disclose it and exempt it.  Even if your attorney cannot exempt the asset, he or she can provide you with options (strategic exemption planning, negotiating, or even Chapter 13) to help you avoid losing any non-exempt assets to a Chapter 7 trustee.

Undisclosed Claims and Pending Litigation

I’ve written in the past about the concept of “judicial estoppel” and how – if you fail to mention that you have pending litigation or a claim against someone on your bankruptcy schedules, you could be barred from litigating the claim in the future.
In plain English, this is how it works…  John Doe goes to Mal-Wart to do some shopping, and while he’s there, he slips and falls on a sidewalk that hasn’t been cleared of ice.  John Doe has a potential personal injury claim against Mal-Wart (whether he can win and how much he could potentially win – both of these are irrelevant).  After the accident, he files for bankruptcy and does not list his potential claim against Mal-Wart.  After his bankruptcy case is discharged, he then brings a lawsuit against Mal-Wart.  Mal-Wart brings a motion to have the lawsuit dismissed on the grounds that on a previous legal document that was signed under the penalty of perjury, John Doe asserted – by his omission – that he had no legal claim against Mal-Wart.
That’s judicial estoppel in a nutshell, and many courts would grant Mal-Wart’s motion and dismiss the case on those grounds.  But sometimes a court will allow the lawsuit to proceed.  The law is not uniform on this subject (yet), but there are two questions to consider.  (1) Whether the lawsuit will be permitted to continue and (2) if the lawsuit continues and the debtor-plaintiff prevails, who gets the money?
The answer to both questions may depend on two factors.  (1) What court is the lawsuit being brought in, and what existing case law on these questions is that particular court bound by?  (2) Has the debtor-plaintiff taken steps to demonstrate that the omission was inadvertent?
Sometimes, despite being grilled by their bankruptcy attorney, debtors simply forget about a potential claim that they have or – more frequently – they don’t realize that they even have a cause of action.  If they later file a motion to reopen the case and disclose the asset, that goes a long way to demonstrating that the debtor did not intend to deceive or hinder creditors – especially if the claim would have been exempt all along.
If a lawsuit is permitted despite judicial estoppel, it is generally accepted that the Trustee will always have a right to pursue those funds.  Whether the debtor has any right to the funds will again depend on the court and a demonstration of intent.
Moral of the story?  Unchanged.  Make sure that you list any potential claims (such as personal injury cases, breach of contract cases, class action suits, etc.) immediately when you file for bankruptcy.

Anecdotes – nondisclosure of assets, perjury, and bankruptcy fraud

From a press release last week from the Madison division of the FBI.
Bonnie Block of Lancaster was sentenced to two years probation and a $1,000 fine for failing to disclose $10,750 she held in a bank account on the date her bankruptcy case was filed and for lying about how she spent the money when questioned about it.
Two years probation and a $1,000 fine, by the way, was hardly the maximum that she could have faced for her crime.  She could have been imprisoned for up to 5 years, and the fine could have been a lot more.
The bankruptcy court denied her discharge.  Additionally (the press release doesn’t detail this, but I have it on good authority from a former trustee in that district), she ended up having to turn over the hidden funds.
Now, I can’t speak as to the totality of the exemption math in her case.  But it is likely that she would have been able to protect almost half of that money if she had disclosed it and used state exemptions.  (Federal exemptions may well have protected even more.)  Or she could have gone the Chapter 13 route.  Instead, she lost the entire amount, attorney fees for representation in the bankruptcy, attorney fees for representation in the criminal proceedings, her discharge, the fine, plus the criminal mark on her record.
Lesson of the story: no matter how bad you think something might be in bankruptcy, lying and getting caught is going to be MUCH WORSE.  Always be honest with your attorney and disclose all of your income and assets.

Post-filing changes to your mortgage payment.

If you’re a Chapter 13 debtor with a mortgage, you have probably been noticing the occasional letter in the mail from your mortgage company with a form captioned either as “Notice of Mortgage Payment Change” and/or “Notice of Post-Petition Mortgage Fees, Expenses, and Charges”.

Debtors who have been in Chapter 13 for more than a year and a half might be a little more puzzled about these notices than newer Chapter 13 clients.  That’s because, before December 2011, these notices didn’t exist.  They are part of Fed. R. Bankr. P. 3002.1(b) and (c).

Apart from curing mortgage arrears, bankruptcy law doesn’t allow for the modification of the terms of a mortgage secured solely by a principal residence (11 U.S.C. § 1322(b)(2)).  That means that if you have an adjustable rate mortgage, a balloon provision, a high mortgage interest rate, or any other unfavorable term – you’re still stuck with those terms in a Chapter 13 bankruptcy.

So, when your interest rate adjusts periodically per the terms of the mortgage, your mortgage has and will continue to change throughout the life of your mortgage.  However, while in bankruptcy, and effective 12/1/2011, the mortgage company is required to file a Notice of Mortgage Payment Change” with the bankruptcy court.  These notices are also very commonly filed each year in cases where there is an escrow for property taxes.

Really, the notice of mortgage payment change doesn’t have a material impact on a bankruptcy case, other than it affords your attorney and other interested parties a chance to be aware of the change.  But, aware or not, you are responsible for making the new mortgage payment as reflected on the notice, unless you have grounds for objecting to that change (and successfully contest that change).

The second notice is for post-petition fees, expenses, and other charges.  I see these most often filed some time after a motion for relief from stay (which happens when a debtor defaults on post-petition mortgage payments) for late fees, penalties, and legal fees associated with the motion for relief.  I also see these for periodic property inspections.

Now, these fees are above and beyond your ordinary mortgage payment, and they will need to be paid separately – either soon after the charge is incurred, or at the end of your bankruptcy plan.  FRBP 3002.1(f-h) outlines the procedure for the mortgage company to make a statement concerning any remaining arrears that exist prior to you receiving your Chapter 13 discharge.  These post-petition charges are not paid by the trustee unless they are filed as supplemental proofs of claim.

So – it’s something to be careful of and watch out for, especially as you near the end of your Chapter 13 Plan.  Again, there’s nothing new about post-petition charges, but at least now you are receiving notices about them through the bankruptcy court – which is more notice than debtors got before December 2011.

Note:  The way we have constructed our new conduit mortgage provision does allow for the trustee to automatically make adjustments to plan payments to accommodate both a change to mortgage payments and a for additional charges.

Read what you sign (and the words on documents actually have meaning).

There’s a popular maxim in law: “ignorance of the law is no excuse”.  What does it mean?  Put simply, you can’t kill a man, then walk into court and claim you didn’t know that homicide was illegal.  But this legal doctrine extends to all laws, not just homicides.
I’ve often joked that if this statement is true, why do people need lawyers?  If everyone is expected to know and understand the laws, why do lawyers need to exist to interpret laws and give counsel to our clients?
Nevertheless, ignorance of the law is no excuse.  And so today, I wanted to address some common misconceptions in bankruptcy law.  By no means do I expect that someone without training in law to know and understand bankruptcy law as well as I do.  This is why I try to educate my clients on how to conform their behavior before filing for bankruptcy – so they don’t make any bad decisions.  Sure, some of my clients ignore my advice and end up screwing themselves over in the process.  But what about the clients who make a mistake before they even meet with an attorney?
So with that in mind, here are some things for you to keep in mind…
Rule #1.  Read the stuff you sign.
I know very few people actually stop and take the time to read a lengthy contract, mortgage, or service agreement.  But if the other party to the agreement does something that you don’t like, but it is permitted in the contract, you’re not going to gain the sympathy of a judge when you say “I didn’t know my mortgage had a variable rate, even though it says so in the paperwork I didn’t read.”
Rule #2.  The words on documents have meaning!
“That’s not my car – that’s my daughter’s car.”
The title to your daughter’s car is in your name because your 17 year old daughter isn’t old enough to own property.  It doesn’t matter if the car is used by her exclusively.  Your name is on the title.  It’s YOUR car.
“The credit card is not in my name, it is in my dad’s name.  I use the card, so it’s my debt, and I pay it.”
No, it’s your dad’s debt.  That your dad was willing to let you rack up charges on the card doesn’t make it any less his responsibility.  Your discharge won’t wipe out his debt, even if you were the sole user of the credit card.  Now, if you cosigned on it, the discharge will eliminate your liability.  But dad is still on the hook for the card.  Oh, and any payments that you make on the card are for his benefit, and constitute a preference.
“This credit card is a business debt because I use the card exclusively for business purposes.”
LLC’s and corporations are separate legal entities that can owe separate debts that the owner of the LLC or corporation is not individually liable for (notwithstanding any personal guarantees, which are essentially cosigned debts between the business and the business’ owner).  However, having a business does not automatically convert certain debts into business debts, just because you use a credit card for business purposes.  Did the LLC or corporation sign the credit agreement?  Or did you sign it?
The first two examples demonstrate that there are a lot of informal agreements that exist between families and friends that have little or no legal bearing.  Let’s do the opposite.  What about a credit card that is only in your name?  Is your spouse liable?
Rule #3.  Sometimes, the words on documents have no meaning!
Just because I want to confuse you…  If you live in a community property state (like Wisconsin), are married, and rack up debt after you are married, then your spouse is most likely liable for those debts.  There are exceptions to the rule, of course.  But generally, it doesn’t matter that the credit card is only in your name.  If it is a post-marital debt, both you and your spouse bear liability on the debt.
Rule #4.  Unless you’re renting or living with mom and dad, you own the real estate.
“I don’t own my home.  The bank does.”
Okay, you own your home.  The bank has a lien against your home – known as a mortgage.  This is not the same as ownership.  Check the deed.  It’s your name on the deed, not the mortgage company’s.  You own it.  The mortgage company can seize the property if you don’t pay the mortgage.  But until that happens, you own it.
Rule #5.  Bankruptcy is good against the world.
“I’m not filing bankruptcy on that.”
Yeah, that’s not how this works.  Except in asset cases, debts are not dischargeable or non-dischargeable because you did or didn’t list them on your schedules.  You can choose to reaffirm a mortgage or car loan.  But you still have to list those debts as a matter of due process.  Same is true of non-dischargeable student loans, child support, and taxes.  The laws and what you do after a bankruptcy case is filed will determine what goes away and what doesn’t.  Don’t get cute with your lawyer and conceal debts that you “don’t want to include.”  That’s now how this works, and you’ll end up screwing yourself over when you do this.
I could go into a lot more detail about this rule, but suffice to say, I’ve written about it extensively in the past.
Rule #6.  Just because you hide your assets from your family or the IRS doesn’t mean you should hide them from your lawyer.
“Do you own any firearms or jewelry?”
“Not that anybody knows about.”
“Well, now I do.  What do you have?”
“Let’s pretend that I didn’t tell you.”
“Let’s pretend you did.”
“These are well hidden.  Nobody would ever find out!”
“Care to test that theory under the penalty of perjury?”
Don’t get cute with your lawyer.  Especially when it is unlikely that such disclosures would even have a negative impact on your case.  Do you really want to get sentenced to federal prison for committing perjury over something that wasn’t going to get you in trouble in the first place?
Rule #7.  A good lawyer will grill you and make you uncomfortable.  It’s better that your advocate do it, rather than the trustee or a judge.
“I haven’t had any income in the past six months.”
“Really?  Well, you indicated that you are current on your mortgage payment.  You have kids that you’re feeding.  How are you paying all of these bills without any income?”
Sound insulting?  Maybe.  But it’s better that I know [about the $50,000 you have squirreled away under your mattress, or the under-the-table cash job you have been working and concealing from the IRS, or that you’re charging $5k a month to your credit cards] now, rather than waiting for the judge to ask you this question in court, when it’s too late for me to do anything to help you.  Attorneys don’t catch every inconsistency, but a good lawyer will catch most of them.  Rather than be insulted that your attorney is grilling you, be grateful that he uncovered the issue before someone else did.
Rule #8.  Your emotions are seldom relevant.
Sure, there is a fair share of unfair and unjust laws on the books.  Bankruptcy laws are no different.  For as much as I can bash legislators for being corrupt and stupid, the fact of the matter is that they strive to write laws that are fair and balanced, and laws that take into consideration the interests of all parties, laws that protect the rights of all parties, and laws that produce just results.
Accordingly, many laws (particularly bankruptcy) is written in very sterile and formulaic terms.  A lot of the emotional appeals people make – about how they tried really hard to pay their bills, or that the debt isn’t their fault, or that an acquaintance duped them into losing all sorts of money.  Most of that won’t matter.
Which is not to say I discourage my clients from telling me these stories.  But you need to understand that the bankruptcy laws are written in a very formulaic and sterile manner.  In exchange for a discharge, the court demands information about the money you earn, the money you spend, the stuff you own, the debt you owe, and information on recent transactions.  It’s a very bureaucratic process.

Undisclosed Claims & Judicial Estoppel

If you needed another reason to disclose assets to your bankruptcy attorney, here’s one.

Patricia Plaintiff is involved in an auto accident.  She is thinking about suing the other driver for damages.  She is also planning to file for bankruptcy.  Worried that the money she would be entitled to from the accident would be seized by the bankruptcy trustee, she delays filing her lawsuit in the hopes that her bankruptcy attorney (and everyone else involved in the administration of her bankruptcy case) does not learn about the asset.

Patricia Plaintiff made a huge mistake by keeping her potential claim a secret.
  1. She wrongly assumed that the trustee would have a claim to the money.  Federal exemptions currently protect more than $20,000 for a personal injury claim, plus any wildcard exemption that the debtor has remaining.  Wisconsin exemptions can protect the first $50,000 of a personal injury claim.
  2. Because she omitted her contingent asset, she will most likely not be allowed to claim her exemptions later, if and when the asset is discovered.  The exemption she would otherwise have been entitled to can be denied for failure to disclose the asset initially.
  3. Because she did not list the asset on her bankruptcy schedules. she could be barred from filing the lawsuit later due to judicial estoppel, which precludes a party from taking a position in a legal proceeding (the personal injury lawsuit) that is inconsistent with a position the party took in a prior legal proceeding (the bankruptcy case).  In other words, by omitting her personal injury claim, she basically testified to the bankruptcy court that she has no personal injury claim.  She cannot then, later, go into civil court and assert that she has a personal injury claim.

Contingent assets are assets that a person has a future interest in, but does not presently have possession over.  A contingent asset might be of unknown nature or value.  Examples of contingent assets include personal injury claims, breach of contract claims, tax refunds, and inheritances.
Nevertheless, the existence of a contingent asset is still a valid legal interest, even if the value of such an asset is yet to be determined.  The uncertainty of a contingent asset does not excuse a debtor from listing the potential on his bankruptcy schedules.  Care should be taken to disclose as much information about the potential claim as possible, so the trustee can make a determination on the asset.  Sometimes, it is necessary to keep a bankruptcy case open for a long period of time so that the nature and value of the asset can be determined (this does not delay the issuance of a discharge).  Other times, the trustee can predict that the asset will not be worth pursuing, and close the case despite not knowing for certain the ultimate value of the asset.

Another reason to disclose your assets…

Something I try to impart on all of my clients over and over and over again.  Disclose all of your income.  Disclose all of your assets.  It probably won’t affect your case.  And even if it does, it will be less painful to disclose everything than to deal with the consequences if you get busted concealing assets.
Trustees have a new tool to help discover unreported assets – American InfoSource.  American InfoSource provides free services to bankruptcy trustees to locate potential real estate, vehicles, trusts, and other assets that you may have an interest in.
So do yourself a favor, and tell your attorney EVERYTHING.  We can resolve potential issues so much more easily before your case is filed than when you get caught lying after your case is filed.

Bankruptcy MythBusting #9

Myth:  Debts I list on my bankruptcy schedules will be discharged.  OR  Debts I do not list on my bankruptcy schedules will not be discharged.  OR  I can pick and choose which debts to include.
Fact:  A lot of confusion arises because most people think that “listing” a debt is synonymous with “filing against” or “discharging” a debt, which is inaccurate.  Unfortunately, too many people do not disclose all of their debts as they should, and this causes big problems down the road.  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 listed and disclosed.A non-dischargeable debt (such as a student loan or tax debt) is what it is.  You could file bankruptcy over and over again, and list your student loans on your bankruptcy petition each and every time.  Unless you can demonstrate the nearly impossible standard of undue hardship, those student loans are not going away.And a dischargeable debt (such as a credit card or medical bill) is what it is.  So many clients want to keep a particular store credit card, a credit card for making fuel purchases, or they don’t want to file against their favorite doctor.  But the bankruptcy is universal, and all unsecured debts are 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.  In re Guseck, 310 B.R. 400, 402 (Bankr. E.D. Wis. 2004)

Nor does listing your home mortgage and auto loan mean that you are going to lose your house or car.  Most people get to pick and choose which secured debts they will reaffirm or surrender.  Listing secured creditors on your bankruptcy schedules is not itself 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?No matter who the creditor is – a non-dischargeable student loan, a dischargeable credit card, or a home mortgage you intend to reaffirm – they are all legally affected by your bankruptcy filing.  Your bankruptcy case automatically endows you and all of your creditors with certain rights and responsibilities.Disclosing all debts is a matter of proper notice and due process rights.  Each of your creditors is entitled to be made aware of your bankruptcy so that they can conform their behavior accordingly.  If their debt is dischargeable, they may be entitled to object to discharge if they can prove fraud.  Though student loans won’t be discharged, your lender is still required to not make collection attempts while the bankruptcy is pending.  And though you intend to reaffirm your home mortgage, the debt is technically dischargeable, so your lender needs to execute a reaffirmation agreement.And 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 suggest that you have been making preferential payments.But at the end of the day, it is primarily 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.
Want to find out what bankruptcy could mean for you?  Call (920) 490-6160 now to schedule a free consultation.

The importance of disclosing all debts.

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.