Discharge and the Unscheduled Debt: Discharge Requires Due Process

By: J. Ellsworth Summers, Jr. & Scott St. Amand

Often referred to as the “holy grail” of bankruptcy law, a bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. Because of the sweeping relief, a debtor must follow numerous requirements, among the most important disclosing all current or potential claims against the debtor or the bankruptcy estate. Failure of a debtor to be completely forthright on its official bankruptcy claim schedule will, more often than not, result in the Bankruptcy Court denying the debtor’s discharge.

Under the Bankruptcy Code, an individual debtor may not discharge debts which were not scheduled in time to permit a timely filing of a proof of claim – unless such creditor had notice or actual knowledge of the case in time for such timely filing .

The crux of the requirement that a debtor schedule all potential claims can be traced back to basic due process considerations. As the Bankruptcy Court for the Southern District of Florida succinctly stated, “[t]he primary purpose of this discharge exception is fairness to those creditors who, through no fault of their own, were prejudiced by not having the opportunity to protect their rights and assert their interests.” If the creditor had no knowledge of the bankruptcy proceeding, it could not raise a claim or assert its right thereto.