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.

Notice Requirements & Addressing the Correct Creditor

Attorney Greg Holbus will be a guest lecturer at the November 9, 2010 Lou Jones Breakfast Club, which is a monthly meeting of the Wisconsin State Bar’s BICR (Bankruptcy, Insolvency, and Creditors’ Rights) Section to discuss current events and developments in the area of bankruptcy law and other related practices – usually for one free CLE credit.
This month’s topic provides a road map for debtors’ counsel on how to properly serve or notice creditors of bankruptcy filings, motions, and adversary proceedings. Although this lecture is geared toward other attorneys, we hope to illuminate the variety of horror stories that debtors’ counsel often faces when attempting to find the proper creditor and address in a world of massive and complex corporate structures (which creditors seem to like to hide themselves in).
Below are some excerpts from the presentation.

When trying to provide notice or service of process to creditors, debtors’ ability to do so properly becomes difficult in a world where creditors have a couple dozen similarly-named subsidiaries or shell companies in existence, and they have hundreds (if not thousands) of offices scattered throughout the country. Debtors’ counsel find themselves trapped in an absurdly comical game of hide-and-seek, trying to pin down elusive creditors that seem to deliberately hide behind complex and opaque corporate structures. The point of this presentation is to TRY to un-muddy the waters somewhat.

Debtor shall use the address appearing on any two or more communications (e.g. billing statement, collection letters, etc.) received in the 90 days prior to filing the bankruptcy case. 90 day period does not apply to creditors who would be in violation of non-bankruptcy law by sending communications, in which case, the address appearing on the two most recent communications shall be used. 11 U.S.C. § 342(c)(2).

Although the creditor has a duty to terminate and reverse damages resulting from a stay violation, it could not be sanctioned for willful violation since it was not noticed pursuant to § 342 (appears that notice was sent to addresses appearing on a credit report). In re Tillett, 2010 Bankr. LEXIS 1342 (Bankr. E.D. Va. Apr. 23, 2010).

[…] a filed proof of claim shall stand as a notice of preferred address from the creditor. Fed. R. Bankr. P. 2002(g)(1).

“While no summons is issued and served upon the “defendant” in a contested matter, service of a pleading initiating a contested matter is made in the same manner as service of a summons and complaint in an adversary proceeding.” Dean v. Global Fin. Credit, LLC (In re Dean), 359 B.R. 218, 221 (Bankr. C.D. Ill. 2006).

Summons and Complaint shall be served in a manner authorized by FRCP 4, all subsequent documents and pleadings shall be served in a manner authorized by FRCP 5. In addition to FRCP 4, summons and complaint may be served by first class prepaid postage in the following manner:

Domestic or Foreign Corporation, Partnership, or Unincorporated Association: address to an officer, managing agent, general agent, authorized agent by law, or authorized agent by appointment. If agent is authorized by statute and the statute requires, also address to the defendant. Fed. R. Bankr. P. 7004(b)(3).

Insured Depository Institution (any FDIC-insured bank or savings association): address to an officer of the institution by certified mail, or first class mail to its attorney if the attorney has made an appearance. Confirm FDIC-insured status at This requirement can be waived by court order in response to an application, or by the creditor’s voluntary waiver. Fed. R. Bankr. P. 7004(h).

Complex corporate structures – different entities with similar names. The following is a basic corporate structure glossary. There are many names given to different organizational structures, depending on ownership, holdings and purpose. It is important to keep in mind that an organization is either a formally organized entity, or it is not. If it is formally organized, there will be a designated agent for service.  Parent. A formally organized entity that holds an ownership interest in another entity (subsidiary). The Parent company may have its own line of business, which may or may not be related to the business of the subsidiary.  Subsidiary. A formally organized entity that is owned, at least in part, by another company (parent). In large corporate structures, a subsidiary might also be a parent company for another company down the line.  Holding Company. A formally organized entity that exists primarily to own other companies. Similar to a parent company, but usually without its own line of business.  Division. Usually (but not always) an informally organized part of another company. The division may have its own books and records, but is usually not formally organized (no filing with the State. If you are dealing with a company that is called a division, there is usually another company name that you will need to find. For example, “ABC, a division of XYZ Corp.”Shell or Dummy Company. A formally organized entity that will usually not have any assets of business of its own. These sorts of companies are used to shield information regarding ownership, holdings, etc. It is important to realize that these entities are actual companies, at least on paper. Corporate existence can be challenged based on inadequate capitalization and other grounds, but that is an expensive fight, and may not be relevant from a debtor’s standpoint.

When serving a mortgage company on a contested matter or adversary proceeding, it’s helpful to know who’s who in the industry to know whose conduct is at question or whose rights are sought to be modified.Mortgage Originator – the lender whose name appears on the mortgage and note (remember, the mortgage establishes the real estate as security for the loan; the note is a promissory note outlining the terms of loan repayment).Mortgage Holder – present owner of the mortgage; has the right to foreclose.Note Holder – present owner of the note; usu. (but not always) the same as the mortgage holder.Mortgage Servicer – party that accepts payment on behalf of the note holder, also responsible for holding / distributing escrow funds.

Not sure who’s who in your particular mortgage? Send a Qualified Written Request under RESPA to the mortgage servicer. 12 U.S.C. § 2605(e).

Who will know I filed for bankruptcy?

Naturally, all of your creditors will receive notice that you filed for bankruptcy. Otherwise, they wouldn’t know you discharged your debt. Employers are not notified unless (a) you owe a debt to your employer, (b) you are currently being garnished and your attorney has to send your employer a notice to stop the garnishment, (c) you file Chapter 13 and your plan payments are taken out as a payroll deduction.
Bankruptcy is a matter of public record, but I am not aware of any region that publishes them in the newspaper anymore. Quite frankly, there are far too many bankruptcies being filed. Based on current filings, I would estimate that the state of Wisconsin will bear somewhere between 20-25,000 filings in 2009. You are far from alone, particularly given the nature of the current economy.
Pretty much the only people who bother searching for bankruptcy cases in public records are debtor attorneys and creditors. Most people think that they don’t know anyone else who has filed for bankruptcy. In reality, the average debtor (unbeknownst to them) has several close family and friends who have filed.

Can I pick and choose which debts to include in bankruptcy?

Generally no. In bankruptcy, all creditors of a certain class must be treated equally. To do otherwise shows an unfair preference to a group of creditors at the expense of other creditors. There are, of course, distinctions by class. You can’t file against non-dischargeable debts like taxes, child support, and student loans. You will notice that your attorney will still list these debts on your bankruptcy schedules, and this is done for mandatory disclosure requirements.
In chapter 7, your unsecured debts – credit cards, medical bills, personal loans, and the like – will all be discharged. In Wisconsin, we have case law (In re: Guseck) which indicates that debts are discharged, even if they are left off of your schedules. This works to the debtor’s advantage when they simply lose track of all their bills and neglect to add one before they file.
The only real picking and choosing you get to do in Chapter 7 is on secured debts. You can choose to retain property and reaffirm on the debt. Alternatively, you can surrender property and have the deficiency balance discharged. In Chapter 13, we can be slightly more creative and treat creditors differently for a variety of reasons – but only to a limited extent. The rules in Chapter 7 generally apply to Chapter 13 as well.
Many debtors complain that they don’t want to include certain debts. Usually, this is because it is a debt owed to a professional that the debtor wishes to maintain a future business relationship with – most commonly doctors, attorneys, and auto mechanics. However, these creditors are ordinarily unsecured creditors, just like credit cards. They must be listed on schedules and given notice of the bankruptcy, and their debts legally discharged. If you make payments to these creditors prior to filing for bankruptcy, they will constitute a preferential payment which can be recovered by the Trustee by lawsuit and re-distributed to all unsecured creditors.
Although these creditors have no legal right to pursue you for the debts you discharged, you are permitted by statute to pay the debt back voluntarily after your discharge has been issued.