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In Bankruptcy, How Small Is Too Small To Matter?

Skavysh v. Katsman, No. 12 C 3807
Appeal from District Court, ND IL ED
Decided: November 19, 2014

If a Debtor intends to pay people back following discharge, are they “creditors”? Put another way: Who is a creditor in Bankruptcy?

The Issue

That was the issue in Skavysh v. Katsman, which started out as a simple Chapter 7 before Judge Wedoff in the Northern District of Illinois, Eastern Division, worked its way through the District Court, and eventually ended up before the 7th Circuit Court of Appeals. The central question revolved around when a Debtor’s omission rises to a level that is sufficient to justify denying Discharge.

The Facts

The Debtor/Appellant was an immigrant with limited knowledge of English who omitted members of her family from Schedule “F” of her Petition – unsecured creditors. These people had supported her through a nasty divorce and she fully intended to pay them back. When her step-son challenged her Discharge based on those omissions, the matter went to trial before Judge Wedoff.

In her testimony at trial the Debtor said that since she intended to pay the omitted people back they weren’t really creditors.  It isn’t hard to understand why she might think that: mom, grandma, and uncle Ed aren’t the same as Visa and American Express, after all. And they’re the real “creditors” as the Debtor  saw it.

Judge Wedoff ruled that the Debtor’s omissions were not material enough in value, and did not rise to the level of “fraud” necessary, to deny Discharge. The District Court disagreed. The matter was eventually taken up on appeal to the 7th Circuit.

The Opinion

The Bankruptcy Judge had the benefit of hearing the Debtor’s testimony and deemed her credible: he knew her approach was wrong but thought she was sincere in her beliefs.  By contrast, the Appellate Court focused on the telltale signs that the Debtor had not been sincere: her Attorney did not represent her on appeal, the Attorney did not testify on her behalf at trial, one of the omitted creditors was the Plaintiff here, despite the Debtor’s claim that she had only excluded “friends and family.” In other words the 7th Circuit reasoned that it could not trust her: there were just too many loose ends and inconsistencies.

The Upshot

Taken literally, this Opinion could be taken to mean that no lie in a sworn Federal document is de minimus. They’re all deal killers, because all it takes to undermine the Bankruptcy system is for a Debtor to lie and others to stand silently by.

But does that mean that mistakes or unintentional omissions in a Bankruptcy Petition can result in a denial of Discharge or worse? I would say that is going too far. This Opinion does not depart from the spirit of the Bankruptcy Code by that much. All it really does is to reinforce the fact that intentional misrepresentations will not be overlooked, no matter how minor they appear to be in the big picture.

Your Turn

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