Even though it might seem to make sense to leave certain debts out of your bankruptcy filing, you're not permitted to actually do so.
Written by Attorney Andrea Wimmer.
Updated August 26, 2020
There are a number of reasons why you might think you want to leave certain debts out of your bankruptcy schedules. Here are some reasons that may have crossed your mind:
You know that student loans and certain other non-dischargeable debts are excluded from bankruptcy relief so why include them on your forms at all;
You plan to keep your car or home, and will continue to make payments on the loan;
You want to keep the credit card in case of emergencies, or for travel;
You’ve had the credit card for a really long time and have a good relationship with the issuing bank;
You want to reestablish your credit after filing;
You want to take advantage of the sales that stores offer credit card holders; or,
You don’t want to involve your family member or friend you owe money to in your bankruptcy case.
Here is the important part: Not one of these reasons allow you to leave a debt out of your bankruptcy filing. Not one.
First of all, the Bankruptcy Code requires that you disclose all of your debts on your schedules. You sign your schedules under penalty of perjury (subject to both fines and up to five years in federal prison). You cannot directly lie on your bankruptcy forms or lie by omission. Leaving something out that you’re required to disclose is a lie! Intentionally omitting (not listing) a debt is a federal crime. None of the reasons listed above are worth the risk!
Let’s take a closer look at the reasons stated above, and why leaving a debt out of your bankruptcy won’t actually accomplish what you hope it will.
Student loans & Non-Dischargeable Debts
You know that, generally speaking, student loans and certain other debts are not discharged in bankruptcy. Whether or not a debt is dischargeable or eligible to be wiped out in a Chapter 7 filing, you must still list it. If you owe a debt, list it. This includes student loans, recent tax debts, child support obligations, everything.
Secured loans are things like your car loan or mortgage. You want to keep your car or home, and will continue to make payments on the loan. That is perfectly ok, and in fact, it’s great that you will be in a position to be able to do that! It does not mean, however, that you can leave out information about the secured loan and the asset on your schedules.
Generally speaking, you can keep your property as long as you stay current on your loan payments. One way to keep your property and continue to make payments on the debt is to enter into a reaffirmation agreement. When you sign a reaffirmation agreement, you are signing a new contract with the creditor that tells them that you will continue to be responsible for this debt even after your bankruptcy is discharged.
Credit Card Accounts
You think you might want to keep the credit card for whatever reason. That’s not at all unusual. In fact, some people consider paying off a credit card before filing for bankruptcy protection so they can keep it after the case is filed. After all, if you have a zero balance, you don’t owe a debt to list, right? While that is technically true, that does not mean that it is in your best interest to use your hard-earned money to pay on the credit card you want to keep open. Instead, you may want to consider other options after receiving your discharge. It’s a myth that you aren’t able to open another credit card account after filing for bankruptcy.
A zero balance does not mean your account won’t be closed by the issuer
Even if your credit card issuer is not notified of your filing initially because you have not listed them as a creditor in your case, they will most likely eventually find out. When they do, the agreement you entered into with the creditor (generally, your credit card agreement) typically authorizes your credit card company to either close your account, reduce or completely eliminate available credit, or take other actions on your account that will make it either impossible or, at the very least, impractical to continue using the credit card. This is why listing the credit card account, even if you are current and have a zero balance, is a good idea.
It does not matter that you’ve had the card for decades and have a good relationship with the bank or creditor. The action they take with your account upon discovering your bankruptcy filing will be made by a different department than the folks you dealt with pre-bankruptcy. Whatever their policy, that is what they will do with your account. In short, even if you have a zero balance on the date the case is filed, the chances that you are able to “keep,” and, more importantly, continue using the credit card are slim to none. In light of that, it really never makes sense to pay off a credit card balance simply to avoid listing it as a debt.
This is especially true if the amount you are thinking of paying before filing for bankruptcy is $600 or more. Not only is that money likely better spent on necessities, payments made in the 90 days before your case is filed that add up to more than $600 have to be disclosed on your Statement of Financial Affairs.
The Trustee administering your case can then “undo” your payment by demanding the money back from the creditor pursuant to a section of the bankruptcy code that says you can’t give preference to any one unsecured creditor over all others. In other words, you can pay off your credit card to avoid listing it only to have your bankruptcy trustee not only alert the creditor to your filing, but also reinstate the balance you paid off. You’ll owe it all over again, putting everything back the way it was before you spent your money to pay the credit card off.
Family members and friends
It is very tempting to leave your family member or friend off your list of debts even though you do in fact owe them money. Don’t. Remember – you’re signing an oath that you have listed all persons and businesses you owe money to. It may be embarrassing to admit to your family member or friend that you have had to seek bankruptcy protection, but that is nothing compared to telling them that you are being prosecuted for bankruptcy fraud.
Creditors that are listed on your schedules don’t have to do anything in a no-asset case. This goes for your family members and friends too. The only time they would take action or get involved in your case is if they want to receive a distribution from your Trustee, which does not happen in 96% of cases. In no-asset cases, you have nothing for the Trustee to sell and distribute to your creditors or anyone you owe money to.
Debts to friends or family will be discharged along with the other eligible debts discharged in your bankruptcy. When you receive your discharge order, no one you owe money to can attempt to collect from you for any debt discharged in your bankruptcy. However, you are absolutely allowed to repay any debt back after your bankruptcy is all said and done, if that’s what you want to do.
While your bankruptcy filing may not affect each one of your debts the same way, you cannot leave any debts out of your bankruptcy. Doing so not only impacts your ability to get a discharge of the debt, it also risks the success of your bankruptcy case as a whole.