Don’t Rely on the Breezley Case.

The Ninth Circuit Court of Appeals held in Beezley v. California Land Title Co. (In re Beezley), 994 F.2d 1433, 1434 (9th Cir. 1993) that debts not listed on Schedule F in a no-asset Chapter 7 case are discharged notwithstanding the failure to list the debt.

A no-asset case is a Chapter 7 bankruptcy where all of the debtor’s assets are exempt and, therefore, not sold and administered for the benefit of creditors; instead the debtor keeps all of his or her assets throughout the bankruptcy.

Many times I find clients are not especially motivated to track down all of their creditors when they learn about the Breezley case.  Here is a true-life example of what can happen when you rely on the Breezley case.

Client filed Chapter 7.  IRS refunded my client over $7,000 after the bankruptcy case was closed, despite the fact that my client owed the IRS a lot of non-dischargeable taxes, meaning the IRS made a mistake.   It normally keeps tax refunds where the taxpayer owes for other years.  Client didn’t have sufficient exemptions to keep this unexpected windfall. The bankruptcy trustee reopened the case and administered the newly discovered asset. This, of course, made Breezley inapplicable as the case was no longer a no-asset case. After the case closed–for the second time– a large creditor stepped forward claiming lack of notice and therefore no discharge of his debt. It seems that creditor was not listed.  The Breezley case was no help to us whatsoever as the case had been converted into an asset case when the IRS unexpectedly and mistakenly paid the debtor a tax refund.

The moral of the story is that you rely on the Breezley case at your peril.  You never really know, even after the case has been closed, that you have a no-asset case.  Thus, it’s always a good practice to list all creditors with correct and recent address.  It’s very important that the creditors get notice of the bankruptcy so they can note their records about the discharge of the debt.

And remember, there is the rule that inheritances from a death within six months of filing bankruptcy are part of the bankruptcy estate.  That’s another way to change a case into an asset case, which can be an unexpected big surprise.