Dischargeability of debt

A fellow bankruptcy attorney recently posed an interesting question regarding the dischargeability of an obligation to pay workers compensation insurance premiums.  Here is the exchange I had with him:

Question:

Is money owed to the “State Fund” for unpaid workers compensation insurance premiums by a debtor as a responsible officer of a defunct corporation

Before getting into the meat and potatoes of today’s post, I want to acknowledge a comment by a fellow bankruptcy attorney.  At a recent continuing legal education presentation she asked why I hadn’t been regularly posting, and encouraged me to post more frequently.  I must confess that since I hadn’t heard much from my readership, I was a bit discouraged.  Her words put a fire under my seat — which is better than the fire I get from the spicy food I foolishly love — so I will try to be more regular (daily prune juice is helping).

In any event, I recently answered a couple of questions posed by a fellow bankruptcy attorney — not the same one mentioned in the previous paragraph — and thought you might find the exchange interesting.  The questions were:

Debtor was sued in Superior Court and a judgment was entered relating to the repayment of unemployment claims in 2010 to the Employment Development Department – State of California.

Q1: Is this a priority claim?

Q2: If the Debtor’s chapter 13 plan provides for this claim but the EDD does not file a proof of claim, will the claim be paid by the trustee?  If not, will the debt be discharged?
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I’ve been a bit busy lately, and haven’t posted anything for a while.  I plan to remedy this over the next couple of weeks.  This post begins that process of “blogging rehabilitation.”

Some time ago I posted an article discussing the consequences of omitting a creditor in a debtor’s bankruptcy papers.  Recently, I had an interesting email exchange with a colleague, that explored the question in a bit more depth.  This post gives you that email exchange.  I hope you find it interesting.  In the interests of privacy I have changed any personal identifiers.

I.        The Question My Fellow Attorney Posed

We all know that per In re Beezley that failure to schedule a creditor in a no-asset Chapter 7 case does not affect the dischargeability of any debts.  This works both ways, in that debts that would be dischargeable (but for failure to schedule) are discharged, but also that debts that would NOT be dischargeable (such as DSO’s, certain taxes, etc.) are not discharged.  My question regards those types of non-dischargeable debts which are not self-executing, namely fraud claims (523(a)(2)).  Since these aren’t really non-dischargeable unless and until a court makes a finding of the requisite fraud, is there any time limit for a creditor to reopen the bankruptcy case to litigate the fraud claim if they weren’t scheduled?

The specific facts I’m dealing with are:  Debtor filed Ch. 7 and got their discharge.  Debtor failed to list a certain creditor.   Debtor later seeks to reopen Chapter 7 case to amend schedules and add creditor.  Court allows it for some reason, and debtor amends.  Creditor files lawsuit in state court against debtor claiming breach of promise and fraud for prepetition debts.

My bigger question is:  Am I “safe” to file an OSC re: contempt for violating section 524 or, per Beezley, was this debt not discharged?

II.       My Response

I offer my thoughts with a suggestion on the OSC motion.
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A fellow bankruptcy attorney recently asked me this question based on his reading of 11 U.S.C. § 523(a)(7), which provides (with emphasis added):

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss . . .

Since the obligation to repay a social security overpayment is a debt to a governmental unit, but could be characterized as “compensation for actual pecuniary loss,” the questioner wanted to know if it could be discharged in bankruptcy.
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The answer differs depending on the nature of the debt and under which chapter the bankruptcy case was filed.

I.          The Key Exception To Discharge

The key provision of the Bankruptcy Code that we use to answer the question is 11 U.S.C. § 523(a)(3), which states (with emphasis added):

A dischargeunder section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . neither listed nor scheduled under section 521 (a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;

If you’re not used to reading statutory language you may naturally ask:  What does all of this mean?  One thing is clear:  this statutory provision concerns debts that were “neither listed nor scheduled” in the bankruptcy papers “in time to permit . . .”  But to permit what?  There are two things that the creditor would have been able to do in a timely fashion if the debt had been properly scheduled, but cannot because of the oversight.
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If one of your creditors got a judgment against you in a State Court action, you can still discharge that debt in bankruptcy – if it is of the dischargeable variety.

When a debtor files for bankruptcy protection, the long term goal is, of course, freedom from debt.  Unfortunately, not all debts are dischargeable in

I frequently have clients who owe back income taxes to the IRS or the Franchise Tax Board (FTB).  When these clients mention the taxes they tell me that they understand that tax liabilities can’t be discharged in bankruptcy.  While it is true that most tax debts are not dischargeable, there is a special carve-out in the Bankruptcy Code for cases filed under Chapter 7, 11, and 12, and Chapter 13 when the discharge is granted under 11 U.S.C. § 1328(b)  (the so-called “Chapter 13 hardship discharge” that is sometimes available to debtors who have not completed the plan).  As a convenient shorthand and a mild abuse of terminology, we’ll refer to this group of cases as the Chapter 7 case.

Things are slightly more generous if the debtor receives a Chapter 13 discharge under § 1328(a) after completing the Chapter 13 plan.  Unsurprisingly, we’ll call this the Chapter 13 case.  By the way, since all of the statutory references in this post are from the Bankruptcy Code, I’ll leave off the 11 U.S.C. and just give the section.

As you will see, timing is crucial.  Even one day off and the debt is not dischargeable.  Thus, as you read the post you will see how important pre-bankruptcy planning is in successfully discharging income tax debts.
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