Any property, including assets such as real estate and claims against third parties, must be listed on schedules of the debtor’s bankruptcy petition. Properly scheduling such assets gives notice of their existence to the Chapter 7 trustee and to creditors in the case.
In theory, all assets are available to be liquidated and the proceeds distributed to the unsecured creditors. However, this rule is subject to a large number of exceptions and exemptions. For example, in most states, including California, a debtor with equity in his or her residence can protect some or all of the equity from unsecured creditors by the homestead exemption. A debtor who is not an owner of real property may exempt any property, up to a value of more than $20,000. In addition, there are numerous other exemptions, for certain retirement funds and the like.
If the debtor properly lists all of the assets, then the Chapter 7 trustee’s role is to examine the schedules to see if there are any assets which might generate funds to be paid out to the unsecured creditors. If the Chapter 7 trustee determines that there are no such assets, he or she then files with the court what is known as a “no-asset report.” Once that report is filed, the clerk of court generally will issue a discharge order shortly thereafter. Not too long after that, the case is closed.
When the case is closed, the Chapter 7 trustee is deemed to have “abandoned” the asset to the debtor. This means that the debtor is free to use or sell the asset. However, there are cases in which the debtor fails to list certain assets, either mistakenly or intentionally. In such cases, the Chapter 7 trustee has never had the opportunity to evaluate the asset and whether it might generate any funds for the unsecured creditors. Under such circumstances, property which should have been listed is deemed to remain property of the debtor’s Chapter 7 bankruptcy estate.
If such a problem arises, the debtor can bring a motion to reopen the case to properly schedule the asset. If the court orders the case reopened, the trustee can then evaluate the asset and whether to sell it or abandon it.
This issue is frequently brought up by a person against whom the debtor is making a claim after the bankruptcy. Such a person, for example, might be a defendant in a personal-injury case based on an accident which took place before the bankruptcy filing. Until the claim is properly listed as property of the estate, it is owned by the trustee, not the debtor. So the defendant may assert a defense that the plaintiff lacks standing to try to enforce the claim, because it’s the trustee’s asset, not the debtor’s.
A related defense which the defendant may raise is that of “judicial estoppel.” The judicial estoppel argument is that one should not be allowed to take a position in court in a later case which is the opposite of the position taken in court in a previous case. Here, the argument would be that the debtor has essentially denied the existence of the asset in the bankruptcy case, and having done so should not then be permitted to turn around and make a claim based on the asset in the subsequent different case.
Issues of standing and judicial estoppel usually arise in connection with a motion to reopen the case, with the creditor opposing the motion. These issues arose on that basis in a 2002 California case. The creditor’s position was that the debtor’s failure to disclose the asset was in bad faith. The court held that the bankruptcy court’s denial of a motion to reopen based on the debtor’s alleged bad-faith nondisclosure was an abuse of discretion. The case was entitled In re Lopez, 283 B.R. 22 (9th Cir. BAP 2002).
In response to the creditor’s argument with respect to standing, the Lopez court quoted a decision of the California Court of Appeal in which that court concluded that in the case before it, " . . . the suit can be maintained only if the bankruptcy trustee substitutes in or abandons the claim. There is no possibility of unfair advantage because the bankruptcy court will take appropriate actions to promote the goals of bankruptcy and protect the process."
So the creditor’s standing argument failed.
With respect to the judicial estoppel argument, the Lopez court questioned whether the creditor had standing to make a judicial-estoppel argument in the first place. The court noted that:
" . . . [the creditor’s] possible judicial estoppel defense is a windfall that would bar what might be a successful claim for sexual harassment. The potential loss of that defense seems no greater harm than what is faced by any potential defendants in actions unique to bankruptcy, such as avoidance actions. We question whether this is the sort of harm that would give [the creditor] a right to intervene or standing to oppose reopening."
So the court held that the judicial estoppel argument also failed.
The court then remanded the case to the bankruptcy court to reopen it, so the trustee could look into the asset and decide whether to abandon it or liquidate it.
The issues discussed above demonstrate the importance of the debtor’s accurately disclosing all assets on the bankruptcy petition schedules. There is no limitations period concerning unscheduled assets. If a debtor deliberately hides or mistakenly fails to schedule assets, then he or she can be left to worry for years as to whether the asset is discovered. If the situation is egregious enough, and if it can be shown that the debtor intentionally kept the information from the trustee, the debtor would also have to worry about the possibility of being criminally prosecuted for bankruptcy fraud.