Michigan Bankruptcy Laws/Reopening Bankruptcy Case
I, Walter Metzen, will provide, free of charge as part of your free initial Bankruptcy Analysis, a means test calculation to determine if you are eligible for Chapter 7 Bankruptcy. Nearly 90% of the people who walk through my door are eligible to file a Chapter 7 Bankruptcy in Michigan and get a permanent discharge of their debt. With Chapter 13 Bankruptcy in Michigan, we can develop and affordable repayment plan to fit every budget.
Contact me, Michigan bankruptcy attorney Walter Metzen to learn more about how I can help you get a Fresh Financial Start!.
"The Law of Reopening: Revisited"
By Alexander L. Edgar (1)
It seems to happen all the time. A debtor files a Chapter 7 petition and within several months receives her §727 discharge. (2) Shortly thereafter, the bankruptcy clerk's office closes the case pursuant to §350(a) and Federal Rule of Bankruptcy Procedure 5009 (Fed. R. Bankr. P.).
Within months, the debtor is contacted by a long forgotten landlord, credit card issuer, or relative whose debt was not listed on the schedule of creditors and who is now demanding payment of it. The nervous debtor contacts her bankruptcy counsel and explains that her failure to list the debt was a mistake, the result of forgetfulness or inadvertence. The harried attorney says "No problem," and directs his paralegal to draft a motion to reopen this closed no-asset consumer bankruptcy case. The attorney plans to follow this by filing a motion to amend Schedule F, to add the name of the omitted unsecured creditor and the amount of that debt. (3) The clerk's office processes the pleadings, and in due course the bankruptcy court enters an order granting the requested relief.
Sound all too familiar? Probably, but is the time and effort taken to reopen a closed no-asset consumer Chapter 7 case and to discharge an omitted creditor necessary to provide a debtor with the full benefit of her discharge and a fresh start? Perhaps, but as the Court of Appeals for the Sixth Circuit has observed, among bankruptcy and appellate courts widespread confusion still exists concerning unscheduled Chapter 7 debts in no-asset cases and the efficacy of reopening such bankruptcy cases to include them. In re Madaj, 149 F.3d 467, 468 (6th Cir. 1998). (4) This confusion is caused by decisions that erroneously hold that, once a case is closed, the debtor must reopen her case in order to discharge a prepetition debt by amending her schedules to list an omitted creditor.
A Chapter 7 bankruptcy case can be reopened after discharge and case closure under certain circumstances. Bankruptcy Code Section 350(b) authorizes the bankruptcy court to reopen a case for various reasons including to "administer assets, to accord relief to the debtor, or for other cause." Fed. R. Bankr. P. 5010 states: "A case may be reopened on motion of the debtor or other party in interest pursuant to §350(b) of the Code." (emphasis added). See In re Chalasani, 92 F.3d 1300, 1308 (2d Cir. 1996). Accord In re Thompson, 16 F.3d 576, 581-82 (4th Cir.), cert. denied, 512 U.S. 1221, 114 S. Ct. 2709, 129 L. Ed. 2d 836 (1994); In re Rosinski, 759 F.2d 539 (6th Cir. 1985); In re Mattera, 203 B.R. 565, 568 (Bankr. D.N.J. 1997); In re Bianucci, 4 F.3d 526, 528 (7th Cir. 1993); In re Shondel, 950 F.2d 1301, 1304 (7th Cir. 1991) (discussion of "other cause" sufficient to justify reopening Chapter 7 case).
Ultimately, however, the decision to reopen is within the discretion of the court, and merely granting a motion to reopen does not afford substantive relief but simply provides the opportunity to request further relief. Chalasani, 92 F.3d at 1307-08. Accord In re Leach, 194 B.R. 812 (E.D. Mich. 1996); In re Germaine, 152 B.R. 619 (B.A.P. 9th Cir. 1993).
In using its discretion to grant such a motion, "the bankruptcy court should exercise its equitable powers with respect to substance and not technical considerations that will prevent substantial justice." Stark v. St. Mary's Hospital (In re Stark), 717 F.2d 322, 323 (7th Cir. 1983) (per curiam). Hawkins v. Landmark Finance Company, 727 F.2d 324, 326 (4th Cir. 1984) (involved the reopening of a case to permit a lien avoidance proceeding; the determination to reopen a case is left to the sound discretion of the court and depends upon the circumstances of the case).
Bankruptcy Code §727(b) provides that a discharge releases a debtor
from personal liability for allowed claims
In addition, §523(a) addresses the nondischargeability of particular debts and provides in part:
Many bankruptcy courts routinely grant debtors' motions to amend schedules to list previously omitted creditors. See, e.g., In re Halstead, 228 B.R. 915, 915-16 (Bankr. S.D. Ind. 1998). The Court of Appeals for the Seventh Circuit has confirmed the expansive rule that a debtor in a no-asset case "may reopen the estate to add an omitted creditor where there is no evidence of fraud or intentional design." Stark, 717 F.2d at 324. See, also, In re Moyette, 231 B.R. 494 (E.D. N.Y. 1999) (a bankruptcy court abuses its discretion in denying to reopen a case to amend schedules to add a creditor in the absence of fraud, recklessness, or intentional design on the part of the debtor).
One line of appellate-level cases has focused on the concepts of prejudice to creditors and of fraud or intentional design in the §350(b) analysis. Samuel v. Baitcher (In re Baitcher), 781 F.2d 1529 (11th Cir. 1986); In re Rosinski, 759 F.2d 539 (6th Cir. 1985) (extremely narrow decision addressing the propriety of reopening the debtor's case, holding that to permit a no-asset debtor to reopen her case in order to amend schedules does not prejudice the omitted creditor and emphasizing the subjective mental state of the debtor in failing to list the debt); Hawkins, 727 F.2d at 324; Stark, 717 F.2d at 322 (the right of the creditor that is protected by § 523(a)(3) is the right to timely file a proof of claim). Accord Judd v. Wolfe, 78 F.3d 110, 114-15 (3rd Cir. 1996); In re Doherty, 176 B.R. 483 (Bankr. S.D. Ill. 1994). This established line of cases holds that once a debtor's case is closed, she must have her case reopened in order to discharge the omitted debt. Madaj, 149 F.3d at 468. After the case is reopened, the debtor amends her Schedule F pursuant to Fed. R. Bankr. P. 1009(a), and the now-scheduled debt is subject to the §727 discharge. (5)
However, this practice has been criticized as "pointless" by the Sixth Circuit Court of Appeals, because the omitted debt is already discharged. Reopening the case and scheduling the omitted debt cannot alter that fact. Madaj, 149 F.3d at 469. Declaring the law of reopening to be "counter-intuitive," the Madaj court carefully examined the interplay between §727, §523(a)(3)(A), (a)(3)(B), and Fed. R. Bankr. P. 2002(e) and framed the judicial question (and its answer) by asking:
In other words, reopening a closed no-asset case to add a creditor has no effect on whether the omitted debt is discharged. See Beezley v. California Land Title Co. (In re Beezley), 994 F.2d 1433, 1434 (9th Cir. 1993) (per curiam); American Standard Ins. Co. v. Bakehorn, 147 B.R. 480, 483-84 (N.D. Ind. 1992).
In general, the debtor's only articulated reason for seeking to reopen the case is to add inadvertently omitted creditors, and she often files the motion to reopen "in the mistaken belief that adding the creditor to the schedules is necessary for the debt to be discharged." Lawrence P. King, 3 Collier on Bankruptcy ¶350.03, at 350-6 (15th ed. rev. 1999); In re Harmon, 213 B.R. 805, 807 (Bankr. D.Md. 1997). However, in a no-asset Chapter 7 case, in which creditors will not receive any distribution from the estate, "there would be no purpose served by reopening a case to add an omitted creditor to the bankrupt's schedules." Judd, 78 F.3d at 115. Indeed, reopening under these circumstances "is for all practical purposes a useless gesture." Madaj, 149 F.3d at 468 (quoting in re Hunter, 116 B.R. 3, 5 (Bankr. D.D.C. 1990)).
The court's analytical approach in Madaj differs from the Fifth Circuit Court of Appeals' analysis in Stone v. Caplan (In re Stone), 10 F.3d 285 (5th Cir. 1994). In Stone, the husband and wife debtors filed a no-asset Chapter 7 petition after their condominium business venture failed. The debtors neglected to list their condo sellers as creditors, although §521(1) requires debtors to do so. The sellers (creditors) first learned that the Stones had filed for bankruptcy approximately one year after the deadline for filing proofs of claim and after the deadline for filing complaints to determine dischargeability under §523(c). The creditors' sole dischargeability claim was based upon the failure-to-list provision of §523(a)(3)(A). The creditors admitted that the debtors had not engaged in fraud or intentional design in failing to list the condo debt.
The Stones amended their schedules to include the inadvertently omitted creditors prior to the final discharge of the case, but the bankruptcy court ruled that the debt was nondischargeable under §523(a)(3). On appeal, the district court affirmed. The Stones appealed.
Acknowledging the historical and textual ambiguity of §523(a)(3)(A), the Fifth Circuit turned to the legislative history of the Bankruptcy Reform Act of 1978 for guidance, and concluded "that §523(a)(3) must be construed with an eye toward the equitable principles which underline bankruptcy law." Stone, 10 F.3d at 290. See Robinson v. Mann, 339 F.2d 547 (5th Cir. 1964). Because the debtor's failure to list the condo sellers as creditors was due solely to mistake or inadvertence and because these creditors were scheduled in time to protect their rights, §523(a)(3)(A) did not apply, and the omitted debt was dischargeable. Stone, 10 F.3d at 292.
Most recently in In re Wells, 246 B.R. 268 (Bankr. E.D. Ky.
2000), yet another bankruptcy court was confronted with a motion to reopen a
Chapter 7 case to add an omitted creditor. Notwithstanding the suggestion that
the omission of a $28,000 debt to the mother of the debtor's husband may have
been deliberate, the court, citing Madaj, held that where there is no
claim of nondischargeability pursuant to 11 U.S.C. §523(a)(2), (4) or (6), the
discharge entered for the debtors makes it unnecessary to reopen the case and
schedule the omitted debt.
Of course, in no-asset cases creditors do not need to file claims,
because they will not receive any dividend from the estate. See Fed. R.
Bankr. P. 2002(e). Consequently, omitted creditors are not prejudiced by being
unlisted on Schedule F. See Judd, 78 F.3d at 114-15 ("An omitted
creditor who would not have received anything even if he had been originally
scheduled has not been harmed by omission from the bankrupt's schedules and the
lack of notice to file a proof of claim."). Should assets be discovered at a
later time, the bankruptcy case then may be reopened. See Shondel, 950
F.2d at 1306. At that time all creditors are notified and given a reasonable
period in which to file their claims. See Fed. R. Bankr. P. 3002(c)(5);
Stark, 717 F.2d at 324; see, also, Lawrence P. King, 3 Collier on
Bankruptcy ¶350.03, at 350-5 to 350-6 (15th ed. rev. 1999).
If a debt falls within a §523 exception, "reopening the case to schedule the debt does not render it dischargeable." 3 Collier on Bankruptcy, ¶350.03 at 350-6. However, if the debt does not fall within the exception, it "is discharged regardless of whether it ever was scheduled." Id.; Wells, 246 B.R. at 271.
Commentators and the courts have suggested various options for parties faced with the question of whether to reopen to list names of and claims for omitted creditors. See Lauren A. Helbling and Christopher M. Klein, The Emerging Harmless Innocent Omission Defense to Nondischargeability under Bankruptcy Code Section 523(a)(3)(A): Making Sense of the Confusion over Reopening of Cases and Amending Schedules to Add Omitted Debts, 69 Am.Bankr. L.J. 33, 59-63 (Winter, 1995).
In In re Gardner, 194 B.R. 576, 579 (Bankr. D.S.C. 1996), the bankruptcy court noted several litigation alternatives for debtors and creditors:
See, also, In Matter of James, 184 B.R. 147 (Bankr. N.D. Ala. 1995) (the court listed three ways to litigate dischargeability after a case is closed as opposed to filing a motion to reopen to amend and add creditors).
Several courts have concluded that reopening a Chapter 7 case to add omitted creditors may provide meaningful relief to debtors. In Judd, the debtor alleged that it was "important for her to have all of her creditors listed so that her schedules accurately reflect the discharge of her debts," and that "as a condition of acquiring new credit, prospective lenders may require that all discharges appear on her schedules." Judd, 78 F.3d at 116-17. Acknowledging the possible merit of the debtor's arguments, the Third Circuit remanded the case to the district court for reference to the bankruptcy court and noted that allowing the debtor "to list all of her discharged creditors is in keeping with the practical considerations pertinent to chapter 7 debtors, and in keeping with the primary purpose of the Bankruptcy Act of affording debtors a fresh start." Judd, 78 F.3d at 117. See, e.g., In re McKinnon, 165 B.R. 55, 57 (Bankr. D. Maine, 1994) (maintaining the accuracy of a debtor's schedules is sufficient cause to reopen a no-asset case so that debtors can "fulfill more perfectly their obligations under §521(1) and Fed. R. Bankr. P. 1007 to assure the comprehensiveness of the chapter 7 discharge."); Matter of McDaniel, 217 B.R. 348, 352 (Bankr. N.D. Ga. 1998) (in general, debtor's desire to amend schedules to include additional creditors, and thus accurately reflect all debts owed, constitutes sufficient cause to reopen); In re Jones, 191 B.R. 265, 268 (Bankr. D. Mass. 1996).
Emphasizing the importance of the debtor's right to a fresh start,
the U.S. Supreme Court has long observed: "One of the primary purposes of the
bankruptcy act is to 'relieve the honest debtor from the weight of oppressive
indebtedness and permit him to start fresh free from the obligations and
responsibilities consequent upon business misfortunes.' Williams v. U.S.
Fidelity & G. Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 290, 59 L.Ed. 713
(1915). In furtherance of a fresh start, debtors "are entitled to do what they
can to ensure a comprehensive discharge, get the case behind them, and get on
with their lives." McKinnon, 165 B.R. at 58. Some courts have
authorized procedural guidelines to facilitate the reopening process for needy
Notwithstanding the right of debtors to a fresh start, however, reopening a closed no-asset consumer case to add omitted creditors is not justified for at least two reasons: 1) amending schedules is "pointless" because the omitted debt is already discharged, and 2) the reopening process creates an unnecessary administrative burden on the courts, clerk's offices, creditors, bankruptcy practitioners and the United States Trustee. See In re Thibodeau, 136 B.R. 7, 8 n.2 (Bankr. D. Mass. 1992) (reopening to list an omitted creditor in a no-asset case just to give the debtor peace of mind does not justify the administrative burden that it would impose on the court).
Therefore, in a case where there are no assets to be distributed to creditors, no relief to be accorded to the discharged debtor, and no "other cause" shown for reopening, the courts should adopt the Madaj analysis and decline to reopen the debtor's Chapter 7 bankruptcy case to add an omitted creditor because of the plain language of §350(b), §727(b), §523(a) and Fed. R. Bankr. P. 2002(e). Scheduling an omitted creditor in a reopened case is irrelevant to discharging the unlisted debt. Thus, in the typical no-asset consumer case, the debtor must articulate a specific reason qualifying as "other cause" under §350(b) in order to justify reopening and obtain relief.
Contact me, bankruptcy attorney Walter Metzen to learn more about how I can help you get a Fresh Financial Start!.
Be sure to Obtain a copy of your Credit Report after your Michigan Bankruptcy Filing and check it for Mistakes.
Contact me, bankruptcy attorney Walter Metzen to learn more about how the new Chapter 7 bankruptcy law may affect your case. I offer a free initial consultation so we can discuss your case personally.