Everyone Deserves A Seat At The Table
(Notice to Creditors of a Petition for Bankruptcy)
Debtors file bankruptcy for the purpose of getting a fresh start. But that fresh start is only intended to be granted to the honest but unfortunate debtor. Key to the analysis of whether a bankruptcy petition is made in good faith is the full disclosure of debts, liabilities, other potential claims, all assets, and sources of income and notice to all parties that may have an interest in the proceeding.
Creditors that do not have actual or constructive notice may cause a whole host of problems in
obtaining a successful outcome. Unnoticed claim holders may seek to vacate a confirmation order upon learning of the bankruptcy, retain the right bring an objection to discharge or dischargeability past the deadline for bringing such actions, or in some circumstance, a claim holder may survive bankruptcy and continue to haunt the debtor notwithstanding the discharge of other debts. Even more fundamental, a debtor attests under penalties of perjury that he or she has scheduled all known claims.
What Constitutes Notice?
Before determining when notice is required, first we should determine what constitutes good notice under the bankruptcy code. The bankruptcy code specifically states “there shall be given such notice as is appropriate, including notice to any holder of a community claim, of an order for relief in a case under this title.” 11 U.S.C. §342. Generally, a debtor will send a copy of the petition and all accompanying schedules to all known creditors and parties in interest via mail. The purpose of this is to give all creditors not only notice of the case, but the opportunity to file a proof of claim before the deadline to file. This deadline is also known as the “bar date.”
What Information Needs to Be Given?
Generally, a debtor must give notice of the bankruptcy filing to all creditors, in addition to notice of the bar date. This means that the debtor must send a copy of the petition and all accompanying paperwork to everyone they know they owe money to. Providing notice to creditors serves multiple purposes.
First, the bankruptcy code requires all known claim holders to receive notice of the filing. This means that if a debtor knows a creditor exists, they need to notify them the bankruptcy was filed. When a debtor signs their petition, they are swearing under oath that they included all known information, including creditors. A mistake on the petition is fixable, but purposefully lying on the petition to deceive the court constitutes bankruptcy fraud, and can be punishable by a sentence of up to five years in prison, a fine of up to $250,000.00, or both. The consequences for this may seem severe, but the court’s main goal is to ensure that everyone is disclosing all information they know.
Next, the notice of the bankruptcy also notifies the creditor of the limits imposed on them by the
bankruptcy code. This means that when a creditor receives notice, they need to cease all collections activities, or risk being in violation of the automatic stay. Notice of the petition also starts the timer on a creditors deadline to object to discharge. Creditors have very strict deadlines to meet in a bankruptcy case, and the sooner they are notified the sooner those deadlines are enforced.
Finally, a creditor not notified of a bankruptcy who, in turn, is later notified, may throw a wrench in the ongoing bankruptcy case. If a case is filed, a creditor does not receive the initial notice, but later receives a notice of the plan, that may call into question everything that had happened until that point in the bankruptcy case and potentially cause the case to be dismissed.
Unknown Creditors
A debtor is responsible for scheduling all known claim holders and even those that may potentially hold a claims: an breach of contract claim for example. Known creditors are those creditors that can be ascertained with a reasonably diligent search of the debtor’s books and records. Chemetron Corp. v. Jones, 72 F.3d 341, 346–47 (3d Cir. 1995). Debtors typically provide actual notice by sending the bar date notice to creditors by first class mail; however, other forms of notice may satisfy the requirements of due process so long as such notice is “reasonably calculated, under all the circumstances, to apprise interested parties of the [bar date].” Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314–15, 70 S. Ct. 652, 657, 94 L. Ed. 865 (1950). In contrast, unknown creditors are those creditors “whose identities or claims are not reasonably ascertainable and those creditors who hold only conceivable, conjectural or speculative claims.” In re Thomson McKinnon Sec. Inc., 130 B.R. 717, 720 (Bankr. S.D.N.Y. 1991).
The debtor has to do their best to get notice to the unknown or unreachable creditors. If the debtor can show they have done everything reasonably within their power to give notice to potential creditors, that is normally enough to satisfy the notice requirements.
