California Law on Discharge of Non-Scheduled Debts in a No Asset Chapter 7 Case

by Beverly Bird

With a few exceptions, federal law – not state law – governs bankruptcies. Regardless of whether you live in California or New Jersey, the rules regarding non-scheduled debts in a Chapter 7 proceeding are the same. This is not to say that different judges can't interpret the rules differently, but some common standards apply.

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Chapter 7

A Chapter 7 bankruptcy is relatively quick and cut-and-dried, compared to other chapters. After you file, the trustee appointed to your case liquidates or sells your assets to raise money with which to pay off your creditors. If you have no assets, your creditors receive nothing. If you own only limited property of negligible value, it may not be worth your trustee's time and effort to sell it, so he might abandon these assets. In this case, he effectively gives them back to you, declining to liquidate them, and your creditors get nothing. Even if your trustee is able to raise some money, your creditors will not necessarily receive all you owe. At the end of your case, the court discharges or eliminates any unpaid debts that remain. You're no longer responsible for paying them.

Determining Your Assets

Determining the extent of your salable assets is a little more complicated than it appears on the surface. Bankruptcy law allows you to make use of exemptions to protect some of your property – you can exempt certain assets from liquidation. The federal government has a list of exemptions, but if you live in California and file for bankruptcy there, California law does not allow you to use them. You must instead use the state's exemptions, but California offers two separate lists and you can choose the one that provides you with the most benefit for your personal circumstances. If you use an exemption to protect an item of property, it is no longer part of your bankruptcy estate. Where your Chapter 7 proceeding is concerned, it is as though the asset doesn't exist at all. If everything you own is exempt or abandoned by the trustee, you have a no-asset case.

Exception to Discharge

If you own non-exempt assets when you file for Chapter 7 protection, Section 523(a)(3) of the federal bankruptcy code provides that a debt cannot be discharged if you don't include it in your petition. The rationale behind this is that your forgotten creditor never received notice that you were filing and, as a result, did not have the opportunity to file a claim for any of the money your trustee raised through the sale of your property. The creditor was not able to argue, as part of the Chapter 7 proceedings, that its debt was not dischargeable under the law. Therefore, if you neglect to include a debt in this case, you must still pay it after your bankruptcy is over.

No-Asset Cases

The Ninth Circuit Court of Appeals, which deals with California bankruptcies, ruled in 1993 that no-asset Chapter 7 cases are an exception to the Section 523(a)(3) rule. It reasoned that if a debtor had no assets the trustee could liquidate, his forgotten creditors would not have received payment, even if they had been notified and had been able to file a proof of claim. If the debt was not dischargeable under the law, then it would have remained due and owing even if it had been included. Therefore, not being scheduled in a no-asset case doesn't prejudice a debtor in any way. The Ninth Circuit Court ruled that even if a debt is not included in a no-asset Chapter 7 petition, it is discharged at the end of the proceedings, anyway.

What to Do?

Under the terms of the 1993 ruling, you do not have to reopen your no-asset case to add and discharge a debt you forgot to schedule. It would serve no purpose. In fact, the Ninth Circuit Court upheld the decision of lower courts that a debtor was barred from reopening his case in this circumstance. If a creditor is insisting you owe money because it was not included in your no-asset case, speak with a bankruptcy lawyer about how best to deal with this situation.