Did You Forget Bankruptcy’s Magic Words?


We have an incantation that, uttered when you file the bankruptcy schedules, protects us from certain harm.  Or at least awkward admissions. Remember?

Try saying :   DisputedUnliquidated!

This spell allows you to disclose, notice, and discharge creditor claims without admitting that the debtor is liable or without determining the amount of the claim.  (Can you tell I just got around to reading Harry Potter?).

These two magic words have a less effective sibling:  Contingent.  But Contingent isn’t as frequently useful as Disputed and Unliquidated.

The need for this discussion was triggered by a young lawyer who asked if he should schedule the family members who were suing the debtor for alleged shortcomings in the debtor’s handling of a probate estate.  Counsel was struggling because his client disputed the merits of the suit.

Disputed and Unliquidated to the rescue. Characterizing the claim as Disputed preserves the debtor’s contention that the claim is without merit.  It may be that the probate claim was liquidated, but maybe not.

Don’t lose track of the idea that the universe of  creditors is potentially larger than the people who send a statement monthly;  it includes those who have a claim.

The term “claim” means—(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured;  §101(5)

In the statute,  the “right” to payment includes claims disputed as to liability.

Note, too, that filing before a tort claim is reduced to judgment allows a debtor to file a Chapter 13 without the tort damages being included for purposes of the debt limits. Section 109(e) requires us to count only debts that are noncontinquent and liquidated.  One can list the claimant without including the amount of a claim not yet reduced to a sum certain.

I use Disputed as a means of including all of the creditors of a small corporation owned by the debtor in the individual’s schedules.  I note each corporate debt that isn’t obviously personally guaranteed as “disputed as to the personal liability of the debtor.”  That way, I’ve given notice to any party who may think they have a personal claim against the shareholder, and I’ve provided a reason that I am not including the amount of the corporate creditor’s claim among the total of the debts.

Over the past couple of years there have been cases holding that the scheduling of a debt , without a claim that the debt is Disputed, constitutes an admission of liability.  Then there are the courts who find the scheduling of every debt as Disputed as bad faith.  My conversations with a retired  collection attorney for a Very Large Retail Bank suggested that without all of the statements and the changes in terms in front of you, no one can be sure that the amount set out on a credit card statement is correct.  What to do?

My thought is that you might schedule the debt as Disputed as to the exact amount of the obligation.  Most of our clients don’t dispute they owe the card issuer something;  it’s a trap however if one is bound to the number on the monthly statement.

Entities who assert a claim may be discharged in the case with or without a determination of the merits of the claim, so long as the nature of the claim doesn’t fall in the class of non dischargeable claims.  Creditors with claims that fall under 523(a)(2), (4) or (6) have to act timely within the bankruptcy case to preserve their claims from discharge.

So I exhort my clients to think broadly about everyone who might assert a right to sue them, then I mutter Disputed, and perhaps Unliquidated, over the entry on the schedules, invoking bankruptcy magic.

 Image:  © James Steidl – Fotolia.com

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  1. Do you have a cite for the proposition that disputing all debts is bad faith?