Considerations When Reopening a Chapter 13 or Chapter 7 Bankruptcy

By Matthew Hector

Why Reopen A Closed Bankruptcy Case?
Debtors may want to reopen a closed bankruptcy case to seek relief from the misconduct of their creditors. For example, if a creditor violates the bankruptcy discharge by attempting to collect a discharged debt, it would be necessary to reopen the case to pursue damages for that violation. Pursuant to 11 U.S.C. §350(b), it is possible to reopen a closed bankruptcy case to (1) administer assets, (2) accord relief to the debtor, or (3) for other cause. Although the Code does not define "other cause," "a decision to reopen a case for "other cause" lies within the discretion of the bankruptcy court." In Re: Shondel, 950 F. 2d 1301, 1304 (7th Cir. 1991). This discretion is based on the bankruptcy court's equitable powers, allowing "the bankruptcy judge broad discretion to weigh the equitable factors in each case." Id. This relief is available to debtors, the trustee, or any party in interest. Fed. R. Bankr. P. 5010. Before reopening a bankruptcy case, there are some considerations that must be addressed. These considerations are going to be highly dependent on the facts of the individual case.

Undisclosed Pre-Petition Assets
It is possible for creditors to reopen a bankruptcy case to seek "recovery from a previously undisclosed asset of the debtor." Id. In Shondel, a judgment creditor/injured party sought to reopen the debtor's Chapter 7 case to see recovery from debtor's insurance policy, which was not listed as an asset in her Chapter 7 petition. Although the debtor's personal liability was not affected by reopening the case, it was proper to reopen the case to allow the creditor to pursue relief from debtor's insurer.
The case law on the issue indicates that it is possible for creditors to pursue newly discovered assets, but the cases all speak to assets that existed prior to the debtor's petition, not after-acquired assets. Potential assets, e.g. pre-petition causes of action, are included in this category if debtor was aware but did not properly schedule the cause of action. See In re Lopez, 283 B.R. 22 (9th Cir. BAP 2002)(debtor was allowed to reopen her case to schedule a non-scheduled pre-petition sexual harassment claim as it provided a benefit to the creditors); In re Upshur, 317 B.R. 446 (Bankr. Ct. N.D. GA 2004)(pre-petition EEOC claim was grounds to reopen case and add to Schedule B as it provided a benefit to the creditors). The Lopez court held that even once the ability to revoke the discharge had passed, reopening and allowing the administration of a previously undisclosed claim was warranted as it would provide the estate additional assets that could be distributed to the benefit of the creditors. In re Lopez, 283 B.R. at 28.

For undisclosed assets, the Lopez court also provides insight into how those assets would be administered. A trustee would be appointed upon reopening, and it would be allowed to evaluate whether the Action had value, then prosecute the action and settle, abandon or arrange for the debtor to prosecute the action in exchange for the estate receiving a share of the proceeds. Id. For the purposes of a debtor seeking to reopen a case for other reasons, e.g. violation of the automatic stay or discharge, motion to quit-claim real property, it is important for the bankruptcy practitioner to determine whether any undisclosed assets exist that may give rise to a claim by discharged creditors. This is doubly important when the case was previously filed by a different attorney - never assume that previous counsel's work was 100% accurate.

Revocation of Discharge
Another consideration for a debtor seeking to reopen his case is whether it would give rise to a reason to revoke the debtor's discharge. 11 U.S.C. §727(e) provides that the trustee, a creditor, or the U.S. Trustee may request a revocation of a Chapter 7 discharge up to 1 year after the date of discharge if the discharge was obtained through an unknown fraud of the debtor 11 U.S.C. §727(d)(1), or up to one year from the date the case was closed if the debtor acquired property that is property of the estate or was entitled to acquire property and knowingly and fraudulently failed to report the property or surrender it to the trustee. 11 U.S.C. §727(d)(2) A Chapter 7 discharge may also be revoked up to 1 year after the case is closed if the debtor has refused to obey any lawful order of the court, or refused to testify after being granted immunity from self-incrimination. 11 U.S.C. §727(d)(3). Once the case is over a year past the date is was closed, the discharge cannot be revoked. As such, there is no opportunity for scheduled creditors to attack the discharged based on a fraudulently concealed asset.

Chapter 13 debtors seeking to reopen their case post-discharge run into a similar, but less comprehensive revocation of discharge issue. Pursuant to 11 U.S.C. §1328(e), a party in interest can, within one year of discharge, request the revocation of a discharge if the discharge was obtained via fraud and the party in interest was unaware of the fraud until after the discharge was granted. 11 U.S.C. §1328(e)(1)-(2). Ultimately, for both Chapter 7 and Chapter 13 debtors, it is important to determine whether there was fraud in the underlying petition. For Chapter 7 debtors, it is also important to determine whether there were any undisclosed assets that could be described as knowingly and fraudulently withheld. If the one-year statute of limitations has run, creditors cannot bring an action to revoke the discharge or revoke confirmation of a plan. In re Berry, 190 B.R. 486, 490-91 (Bankr. Ct. S.D. GA 1995).

Given that the grounds for revocation of discharge are so limited, it is highly unlikely that a debtor seeking to reopen his case for any of the purposes listed in §350(b) of the Code will face renewed liability to his creditors. The discharge injunction is permanent and can only be disturbed for the ground enumerated in §§727 and 1328 of the Code. 11 U.S.C. §524. This is further supported by the intention underlying the Code, that the honest but unfortunate debtor be afforded a fresh start. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367 (2007). It would fly in the face of the equitable powers conferred by §350(b) to think that a debtor reopening his case to pursue a discharge violation would suddenly be subject to renewed claims by his creditors if the petition was accurate and complete when filed.

Post-Petition or Post-Discharge Assets
Some debtors may wonder whether reopening the case will bring assets acquired after the bankruptcy was filed, or after the discharge is granted, back into the bankruptcy estate. 11 U.S.C. §541 describes the property of the bankruptcy estate. The Code provides that an interest in property that would have been the property of the estate becomes property of the estate if it is acquired within 180 days after the case is filed. These interests include inheritances, divorce property settlement agreements, and life insurance benefits. 11 U.S.C. §541(a)(5)(A)-(C). It also covers any interest in property that the estate acquires after the commencement of the case. 11 U.S.C. §541(a)(7). This does not appear to cause a problem for a debtor seeking to reopen his case because scheduled assets not administered at the closing of the case are abandoned to the debtor. 11 U.S.C. §554(c). The only true risk would be an asset acquired pursuant to §541(a)(5) where the debtor seeks to reopen the case post-discharge but within the 180-day look back period.

Post-discharge assets would not be reabsorbed into the case upon being reopened - this would both frustrate the fresh start provided by the discharge and significantly chill any debtor's attempts to pursue post-discharge claims. Moreover, once the case is closed, the estate ceases to exist but for the limited of property that is not abandoned, nor administered in the case, which remains property of the estate. 11 U.S.C. §544(d).

Barring a situation where a debtor has willfully or fraudulently failed to schedule pre-petition assets, and attempts to reopen the case within one year of discharge, it is extremely unlikely that the debtor risks any negative affect to his discharge. As to assets acquired post-discharge the Code indicates that those assets cannot become a part of the bankruptcy estate. Likewise, assets that were abandoned by the trustee or abandoned by operation of law, those assets revert to property of the debtor post-discharge. If the trustee failed to administer those assets, it stands to reason that they are also safe from interference when a debtor seeks to reopen his bankruptcy case. It is important, however, to fully analyze the debtor's petition, in particular during the 180-day look back period described in 11 U.S.C. §541(a)(5) and during the 1-year statute of limitations period established for revoking a discharge. Cases where reopening the bankruptcy may be necessary should be evaluated on a case-by-case factual basis before filing the motion. In situations where reopening the case could expose the debtor to further liability, it may be wise to wait until the appropriate time bar has passed.