Bankruptcy can give you a fresh start financially by erasing certain debts, but federal bankruptcy law gives certain protections to creditors, too. Under Section 523 of the U.S. Bankruptcy Code, you are required to give notice of your bankruptcy case to all your creditors. If you forget to list a creditor, you may have to reopen your bankruptcy case if you had assets in your bankruptcy estate that could have paid that creditor.
Asset Vs. No-Asset
Chapter 7 bankruptcy, unlike other types of bankruptcy, involves a liquidation, or sale, of a debtor’s non-exempt assets to pay creditors. By federal and state laws, some categories of assets are exempt from bankruptcy sale so you are not left without enough assets to survive. If you own non-exempt assets to be sold, your bankruptcy may be called an “asset” Chapter 7. If you do not own any assets that are subject to sale, your bankruptcy may be called a “no-asset” Chapter 7 since there is no money available to pay your creditors. Many Chapter 7 cases are no-asset bankruptcies.
Exemptions and Liquidation
Federal law provides a list of exemptions, but the exemption situation is different in each state since state laws addressing exemptions vary. Typical exemptions include a certain amount of equity in your car or house, household furnishings, clothes, books and food items. Assets not specifically exempted by your state’s rules are typically liquidated, including a second home, stocks and certain other investments. Your court-appointed bankruptcy trustee is charged with liquidating all your non-exempt assets and distributing the proceeds from those sales to your creditors. If you have too much equity in your home or car -- beyond the amount allowed by your exemption law -- it, too, could be sold.
Forgetting a Creditor
You have a legal responsibility to list all your creditors on your bankruptcy paperwork, but it is not uncommon for debtors to innocently forget to list a creditor. It’s possible you may not remember the unlisted creditor until after the conclusion of your case. Since only listed creditors are kept informed of your bankruptcy proceedings, forgetting to list a creditor means that creditor does not have a chance to monitor the process and file any claims or objections he might have. Generally, you do not have to reopen your bankruptcy case when you forget to list a creditor as long as you have a no-asset case. Most courts have determined that unlisted debts are automatically discharged, or erased, in no-asset bankruptcy cases since there were no assets available to pay that creditor even if it had been listed. However, if there is evidence you fraudulently failed to list the creditor, the court could reopen your case.
Reopening an Asset Case
When you have assets available for your trustee to use to pay your creditors, it is more important for your creditors to receive notice of your bankruptcy. Notified creditors have the opportunity to file claims for payment when your assets are sold, so failing to list a creditor takes away his opportunity to get paid. Thus, the debts you owe to unlisted creditors are not automatically discharged since those creditors were unable to receive their share of distributions in your bankruptcy. To discharge those unlisted debts, you must reopen your bankruptcy case. If you don’t, your creditor can continue his collection actions against you even after your other debts are discharged.