Not all debts go away in a bankruptcy. Certain types of debt are nondischargeable. Potentially nondischargeable debts, those for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud are dischargeable until the bankruptcy court determines otherwise. Similarly, a debt resulting from willful and malicious injury by the debtor. These types of debts (which are the most commonly litigated in bankruptcy proceedings) are dischargeable until a bankruptcy court rules that it is not dischargeable pursuant to Bankruptcy Code §523(a), §523(c), and Fed. R. Bankr P. 7001 (6).
Bankruptcy Code §523(c) provides that “the debtor shall be discharged from a debt of the kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6) of subsection (a) of this section.” Bankruptcy Code §1328(a) is similar in that it grants “the debtor discharge of all debts provided for by the plan . . . except any debt -- . . . (2) of the kind specified in . . . paragraph (1)(B), (1)(C), (2), (4), (5), (8), or (9) of section 523 (a). . .”.
In other words, a creditor’s naked assertion that a debt is nondischargeable does not make it so – only the bankruptcy court has that power. The procedure to determine dischargeability of a debt is contained in Fed. R. Bankr. P. 7001(6): “The following are adversary proceedings: . . . a proceeding to determine the dischargeability of a debt . . ..” Fed. R. Bankr. P. 7001(6). As Judge Wizmur observed in In re Gullone, “Rule 7001 specifies that a request to determine the dischargeability of a debt must be brought by the filing of an adversary proceeding.” 301 B.R. 683, 689 n. 3 (Bankr. D.N.J. 2003). Although Judge Wizmur acknowledged that “there is support for the proposition that a court may entertain a motion in lieu of a complaint for the types specified in Rule 7001”, it is the bankruptcy court that determines dischargeablity and it must be challenged by a creditor by adversary proceeding, or in some instances, motion. Id.
A Chapter 13 Estate Includes Post-Petition Earnings
Bankruptcy law treats nondischargeable debt differently in a Chapter 7 case than in a Chapter 13. In a Chapter 13 case, post-petition salary/income is part of the bankruptcy estate. In a Chapter 13 case, a creditor holding a nondischargeable claim is not allowed to lift the automatic stay to proceed against the debtor to collect the debt. In re Hopkins, 212 WL 2131952 at *2 (Bankr. W.D. Mo. June 12, 2012) (distinguishing the Chapter 7 cases, In re Embry, 10 F.3d 401 (6th Cir. 1993), In re Watson, 78 B.R. 232 (B.A.P. 9th Cir. 1987), and their progeny, on the basis that post-petition earnings are not property of the estate in Chapter 7.) This is not true for a debtor in a Chapter 7 case. For example, after the bankruptcy court held that the subject debt was nondischargeable, the Emery court determined that the bank account being garnished post-petition by the judgment creditor was not property of the estate, and concluded once a bankruptcy court enters its judgment holding a debt to be nondischargeable, the automatic stay does not preclude execution of the judgment against property of the debtor that is not property of the estate. 10 F.3d at 404.
In Chapter 13, the property of the estate includes all property listed in §541 as well as earnings from services performed while the case is pending. 11 U.S.C. §1306. And, unless otherwise provided in the confirmed plan, the debtor shall remain in possession of all property of the estate. Id.; see Hopkins, 212 WL 2131952 at *2 (discussing why Embry does not apply in Chapter 13 cases).
Hence, allowing a creditor to garnish wages or levy on assets owned by a debtor in a Chapter 13 case would deprive the bankruptcy estate of that property. Yet another reason why stay relief would be denied.
Holders of Nondischargeable Claims Must Wait Out the Bankruptcy
The holder of nondischargeable claim in a Chapter 13 case must wait out the duration of the Chapter 13 case before commencing collection activity. Even if a debtor wanted to pay a holder of a nondischargeable debt differently from other unsecured creditors, doing so would be prohibited. 11 U.S.C. §1325; see Groves v. LaBarge (In re Groves), 39 F.3d 212, 215 (8th Cir. 1984) (holding that a Chapter 13 plan could not provide for more favorable treatment of nondischargeable debt than other unsecured debt).
If the creditor argues that a delay in collecting on nondischargeable debt is unjust, the Hopkins court’s analysis is helpful:
[i]t is the very nature of the automatic stay to cause delay in payments to creditors, particularly a Chapter 13 case. Indeed, its purpose is to prevent judgment creditors from executing on a debtor’s property. If delay in payment and ability to execute were grounds for relief from stay, the stay would have no purpose. The fact that [the creditor] has a nondischargeable judgment does not change that purpose.
Hopkins at *2.
In conclusion, there are at least two reasons why a holder of a potential nondischargeable claim cannot lift the automatic stay to proceed against a debtor: (1) a court must first determine that the debt is nondischargeable; and (2) post-petition income and assets are property of the bankruptcy estate requiring creditors to either be paid as part of the Chapter 13 plan, or wait until the bankruptcy case is closed to collect.
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