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What did they know and when did they know it?

Posted on Aug 27, 2012 in Chapter 7, Wisconsin

A husband and wife file for bankruptcy.  They prepare a list of creditors and receive a discharge in bankruptcy.  That discharge means that those debts listed are forever gone, unless the debtors chose to “reaffirm” the debt.

That is good news, but the Bankruptcy Code has a different rule that applies too:  Section 523(a)(3)(A) of the Bankruptcy Code tells us that the creditors must have notice or actual knowledge of the bankruptcy to allow a timely filing of a proof of claim.  When is this important?  In two cases:  Cases involving payment plans such as Chapters 11, 12, and 13; and Asset Chapter 7 cases in which a trustee sells assets and pays the creditors based on what is received from those assets.

In Chapter 7 cases, there are deadlines to file these claims.  But the courts are generally lenient and want to make sure creditors do get paid.  They don’t want to see creditors harmed if they weren’t aware of the bankruptcy initially, but found out after the report of assets is sent out or from a phone call from the trustee.

Why is this relevant?  Because in this case from Wisconsin’s Eastern District, the debtors scheduled a debt but the creditor never received an initial notice.  Still, it admitted that it had actual knowledge months before the distributions happened.  They could have filed a late proof of claim and been paid on it, but they chose not to do that.  The creditor tried to get the court to find that the incorrect address meant no discharge.  The court refused to do so, because the court found it was most likely “an honest” mistake.

The moral of the story:  As an attorney for debtors, we do everything in our power to schedule all creditors.  But if we make an innocent mistake, and the creditor has knowledge and chooses to ignore it, the court is not going to lash out at the debtor and prevent a discharge.  The creditor has responsibilities too.


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