When you file for Chapter 7 bankruptcy, you must list all of your debts on your bankruptcy schedules (even if you think they will not be wiped out by your discharge). If you have nonexempt assets and your creditors receive a distribution in your Chapter 7, any unlisted debts will typically not be discharged.
In a no-asset Chapter 7 bankruptcy (where there are no nonexempt assets to repay creditors), whether an unlisted debt will be discharged depends on:
- the rules in your jurisdiction
- whether the creditor otherwise knew about the bankruptcy
- whether you inadvertently or fraudulently omitted the debt, and
- whether the omission harmed or prejudiced the creditor.
To learn more about which debts are discharged in Chapter 7 bankruptcy, see our topic area on The Bankruptcy Discharge.
What Happens to Unlisted Debts in a No-Asset Chapter 7 Bankruptcy?
While you should do your best to include all of your debts in your bankruptcy, it’s not uncommon for debtors to accidentally omit a creditor. If you inadvertently omit a creditor in a no-asset Chapter 7 case and that creditor is not prejudiced by the omission, most courts take a “no harm, no foul” approach and still consider the debt discharged.
The reasoning behind the “no harm, no foul” approach is that if the omission was an innocent mistake and the creditor would not have received anything in the bankruptcy even if it was listed, discharging the omitted debt doesn’t cause any harm or prejudice to that creditor. When determining whether an unlisted debt should be discharged, courts might consider factors such as:
- the reasons you failed to list the debt
- whether including the debt in your discharge will disrupt the bankruptcy, and
- whether any creditors will be prejudiced if the debt is discharged.
Exception for the First Circuit
Unfortunately, the First Circuit doesn’t follow the “no harm, no foul” approach adopted by most courts. In a recent case, the First Circuit Court of Appeals held that if you omit a debt in a no-asset Chapter 7, it’s not discharged (unless the creditor otherwise knew about the bankruptcy). Keep in mind that even in the First Circuit, you can still ask the court to reopen the case to add the omitted creditor. But you must show that you have good cause for doing so.
What If the Creditor Is Alleging Fraud?
If the omitted creditor alleges that you fraudulently failed to list its debt or that the debt is otherwise nondischargeable (for example, if you initially obtained the debt through fraud), you will typically have to litigate the issue in bankruptcy court if you want the debt discharged. In that case, you may need to show that you made an innocent mistake, there was no fraud involved, and that the debt is dischargeable.
Review Your Debts Carefully to Make Sure They Are Included in Your Bankruptcy
In general, the best way to make sure that your debts are discharged is to list them and give notice to all of your creditors in your bankruptcy. Before you file your case, obtain a copy of your credit report and gather all of your bills so that you have a good idea of all of your obligations. Keep in mind that certain debts may not appear on your credit report or even have statements (such as money borrowed from family or friends or obligations you personally guaranteed).
Review all of your debts carefully to make sure they are listed in your bankruptcy. If you find that you accidentally omitted a creditor and your bankruptcy is not yet closed, you can also easily amend your schedules to list the omitted debt. (For more information, see How to Amend a Bankruptcy Form.)