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Forgotten Creditor


It seems to happen all the time. A debtor files a Chapter 7 petition and within several months receives her §727 discharge. 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. The nervous debtor contacts the bankruptcy attorney and explains that their failure to list the debt was a mistake, the result of forgetfulness or inadvertence.

If you happen to have filed your bankruptcy in Arizona, which is part of the 9th Circuit, it may not matter as long as your omission of the creditor was not intentional. If your case was what is commonly referred to as a no asset Chapter 7 case the 9th Circuit Court of Appeals has ruled that a creditor who was inadvertently left off of the creditors’ list is still a discharged debt. In re: Beezley, 994 F.2d at 1435-36. At least one Arizona Court of Appeals agrees with the Beezley Court. Webber v. Grindle Audio Productions, Inc. 60 P.3d 224 (Ariz. Ct. App. 2002).

Both the 9th Circuit and the Arizona Court of Appeals reasoned that in a no asset Chapter 7, there are no assets to distribute to any creditor, listed or not. Because the case is a no asset Chapter 7 a date is not set for submitting proofs of claims. No asset cases do not require filing proofs of claims. Fed. R. Bankr.P. 2002(e).

What happens then when grandma decides to sue you for that loan she gave you years ago that you failed to list in your bankruptcy? She will more than likely bring suit in a State Court. What can the State Court do? The 9th Circuit Court of Appeals has determined that they do not have the jurisdiction to determine whether your debt to grandma is dischargeable or not. In re: Lon McGhan, 288 F.3d 1172 (9th Cir. 2002) citing Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074 (9th Cir.2000) (en banc). It appears that grandma will have to go to the Bankruptcy Court to determine if her claim is discharged or not. Based on the discussion above, the Bankruptcy Court should determine that the debt has been discharged and any action in the State Court is void.

Please bear in mind that this article only applies in Arizona and the 9th Circuit. And, as always, please consult with a qualified attorney who is familiar with the decisions in your jurisdiction.

If you are located in Phoenix, Scottsdale, or Tempe, contact the Contact Wright Law Offices online or call 480-845-0145 to set up a free consultation. This article is not meant to be a substitute for legal advice from an attorney.

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