Bankruptcy Lawyer Indiana

What obligations does a bankruptcy discharge cover?  During the past 20 years, the common practice among bankruptcy lawyers has been to assure debtors in no asset bankruptcy cases–cases in which there are not any non-exempt assets available for distribution to creditors–that even if the debtor failed to list a creditor on his schedules, the obligation will be discharged. This practice arose from a no harm, no foul reading of Bankruptcy Code section 523.

The federal bankruptcy rules permit a bankruptcy court in no asset cases to choose not to fix a bar date in which proofs of claim must be filed. Thus, courts adopting the no harm, no foul reasoning found that there was no date in which to timely file the proof of claim and therefore no triggering of Bankruptcy Code section 523(a)(3)(A). See, e.g., In re Beezley, 994 F.2d 1433, 1435-37 (9th Cir. 1993).

Recently, however, the First Circuit Court of Appeals rejected this reasoning, and held that even in a no asset case, if a debt or claim is not scheduled, then the debt is not discharged absent a reopening of the bankruptcy case.

The court’s reasoning in Colonial Surety Co. v. Weizman, 564 F.3d 526 (1st Cir. 2009), is based upon the equities of the situation. Providing notice, even in a no asset case, allows creditors to participate in the case and to argue that there may be assets available. An honest debtor can still have the debt discharged if he asks the bankruptcy court to reopen the case to list the creditor who was inadvertantly omitted and who would have received no benefit from the initial notice. This properly leaves the burden squarely on the debtor’s shoulders to disclose the debt or to explain why it was omitted.

The court appears to protect the institutional integrity of the bankruptcy court so that debtors can not argue that it doesn’t make any difference anyway. Creditors and parties in interest, by this decision, are being afforded a modicum of due process and an opportunity to be heard even in no asset bankruptcy cases.

The lesson to learn from Weizman is to include every possible claim or debt against a debtor on the bankruptcy schedules. We always advise clients to err on the side of over disclosure. Even if a debtor isn’t sure whether a particular debt has been paid or is still owed, we advise the debtor to list the claim. The debtor can always list the creditor as holding a disputed claim. However, by the Colonial Surety case, if a debtor inadvertantly omits a creditor from his bankruptcy filng, it becomes expensive later to move to reopen the case and amend the debtor’s schedules.

Claims that are omitted from the schedules may later be discharged but only after the debtor pays to reopen the case and only provided that the debtor can prove the omission was inadvertant and otherwise innocent.

Every layperson will tell you the same thing: the administration’s Making Home Affordable program is failing to stem the tide of foreclosures. Not only are voluntary mortgage modifications lagging in the face of ever-rising foreclosure figures, but the modifications offered by lenders fail to meet the program’s own requirements, not to mention the needs of the borrowers. The program itself introduces new barriers to the already burdensome process of obtaining a loan modification. Unfortunately, this program represents government at its worst: cumbersome, tedious, expensive and, as it is turning out, useless.

At a recent hearing before the House Financial Services Committee Subcommittee on Housing and Community Opportunity, Congressman Barney Frank of Massachusetts fired a warning shot across the bow of mortgage servicers everywhere: shape up, or watch us pass cramdown legislation, Frank said. Legislation that would allow bankruptcy judgtes to modify mortgages on primary residences is becoming increasingly relevant as reported problems with the program surface.

Tongue in cheek, Congressman Frank said, “The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a good job of modifying mortgages. And if they do not improve their performance, they improve the chances of that legislation.”

Representatives from the administration testified, however, that while there is room for improvement, the program is on track to meet its goal of assisting 3 million to 4 million borrowers over a period of three years–and a ramp-up period was expected. Forty-eight servicers representing more than 85 percent of the market have signed contracts with the administration. Through August 2009, servicers have extended more than 571,000 loan modification offers, and 360,000 modifications are in the trial period required before the modification becomes permanent.

The problem, however, is that even when operating at full capacity, the program will address no more than one-third of all foreclusres. Consequently, between 2009 and 2012, more than nine million families are expected to lose their homes to foreclosure.

The legislation is failing miserably. This is the reason we advocate the prompt passage of Chapter 13 mortgage cramdown legislation so that the homeowner can finally obtain some meaningful assistance.