It’s not at all uncommon for a creditor to contact me and make the argument that its’ debt is not affected by the discharge because it was not “listed.” As always, the first thing I tell them is to consult with an experienced bankruptcy attorney. The second thing I tell them is that there are exceptions to everything.
One of the core principles of any legal proceeding is that any party whose rights or interests are affected is entitled to notice and an opportunity to be heard. It’s called due process, and it applies in bankruptcy court. In fact, bankruptcy is one of the more notice sensitive and transparent proceedings you can hope to find. So creditors won’t be prejudiced if they did not receive notice. But, they are also expected to exercise reasonable diligence, and hiding in the weeds won’t work. So, let’s start with the Bankruptcy Code.
Section 523 deals with debts that are excepted from discharge, including unscheduled debts/creditors. Among the debts that are not affected by the Chapter 7 discharge are those:
(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or
(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;
It will be easy enough to see if the creditor’s name is included in the pleadings filed with the court, by referring to what is known as the “mailing matrix.” Let’s assume it is not included. The question then becomes whether the creditor had “notice or actual knowledge of the case” in time to take appropriate action, such as filing a proof of claim, or objecting to the discharge. Most of the cases will turn on these questions, and will often be quite fact specific. Here are a few statements from various courts which have looked at this issue:
In re Alton, 837 F.2d 457,460 (11th Cir. 1988)
Section 523(a)(3)(B) specifically provides that when a debtor fails to list those debts incurred fraudulently or incurred because of malicious injury to another or lists them too late to allow a creditor to file a proof of claim and a dischargeability complaint in timely manner, then those debts will be undischarged "unless such creditor had notice or actual knowledge of the case in time for such timely filing and request" (emphasis added). The statutory language clearly contemplates that mere knowledge of a pending bankruptcy proceeding is sufficient to bar the claim of a creditor who took no action, whether or not that creditor received official notice from the court of various pertinent dates.
In re Hill, 117 B.R. 663 (Bkrtcy N.D. Oklahoma 1990)
The statutory language [of section 523 (a)(3)(B)] clearly contemplates that mere knowledge of a pending bankruptcy proceeding is sufficient to bar the claim of a creditor who took no action, whether or not that creditor received official notice from the court of various pertinent dates.
Neeley v. Murchison, 815 F.2d 345,347 (5th Cir. 1987)
[Section] 523(c) of the Code, which Rule 4007 is designed to implement, places a heavy burden on the creditor to protect his rights: a debt of the type presented here is automatically discharged unless the creditor requests a determination of dischargeability. The one narrow exception to this rule incorporates a duty-to-inquire approach to notice issues. Under § 523(a)(3)(B), a debt is not automatically discharged if the debtor fails to schedule the creditor and the creditor had no notice or actual knowledge of the case in time to file a claim and a request for determination of dischargeability. Thus, in cases such as this one, it would be inconsistent with the scheme of § 523 to require technical compliance with the notice provision of Rule 4007: this would place the creditor who has written notice of the bankruptcy (albeit deficient notice under the Rule) in a better position than the unlisted creditor whose debt is discharged under § 523(c) if he merely learns of the bankruptcy proceedings in time to protect his rights.
In re Schicke, 290 B.R. 792, 800 (10th Cir. B.A.P. 2003)
The debtor's duty to afford due process is counterbalanced by the creditors' duty to object to the discharge of a debt if it has any notice or knowledge or (sic) a Chapter 7 case prior to the expiration of the time limitation set forth in Fed. R. Bankr.P. 4007(c) (Emphasis supplied by the court)
Creditors who prove the applicability of this section are not entitled to an automatic exception of their claims from a debtor's discharge under § 523(a)(2), (4) or (6). Rather, § 523(a)(3)(B) simply permits the filing of a § 523(a)(2), (4) or (6) complaint after the lapse of any time limitation made applicable under § 523(c) and Fed. R. Bankr.P. 4007(c).
It is pretty obvious that the courts are going to expect a creditor to exercise reasonable diligence if it has notice that a bankruptcy has been filed involving one of its customers. Simply being omitted from the schedules or the mailing matrix won’t always be conclusive.
NOTE: if a creditor successfully argues that it did not have notice of the bankruptcy case, then it does not get an automatic exception from discharge. It gets an opportunity to file a complaint alleging that its’ debt should be excepted from discharge. So the creditor must still move forward, probably at significant expense, to allege and prove in an adversary proceeding that its’ debt is one of those excepted from discharge.