Bank account seized after discharge: enforcement blocked

Background

Our client had been sued by a former trading partner for unpaid goods, but the complaint and the judgment were served by public notice (a method used when a party's address is unknown, treating service as complete once posted by the court), so the client never learned of the case. Shortly afterwards, the client filed for bankruptcy and received a discharge, and this debt was not on the creditor list. Several years later, the creditor relied on that judgment to seize the client's bank deposits, arguing that a debt the client had failed to list was never discharged.

The issue

A discharge generally releases the debtor from all debts that arose before the bankruptcy, but a debt the debtor omitted from the creditor list "in bad faith" survives. The issues were whether the client knowingly left this debt off the list, and who had to prove that bad faith.

Our approach

On the client's behalf, we filed an action objecting to enforcement (a suit asking the court to bar enforcement of a judgment), arguing that a discharged debt cannot be enforced. We submitted records showing that the creditor's earlier lawsuit had proceeded by public notice, and argued that, having never received any demand for payment before the discharge, the client had no way of knowing the debt existed.

The court's reasoning

The court followed Supreme Court precedent that "bad faith" means leaving a debt off the list while knowing it exists; if the debtor did not know of the debt at all, it is not bad faith even if the debtor was careless. It also held that the creditor, as the party alleging bad faith, bears the burden of proof. The creditor offered no evidence, and the court concluded the client did not know of the debt, citing the service by public notice, the absence of any demand before the discharge, and the fact that listing the debt would likely not have changed the discharge.

Outcome

The court granted the client's claim and barred enforcement based on that judgment. However, noting that this lawsuit would have been unnecessary had the debt been listed from the start, it ordered each side to bear its own litigation costs.

What this case means

If a debt that was not on the list is enforced after a discharge, there may be room to challenge the enforcement where the debtor genuinely did not know of the debt. Results depend on specifics such as how documents were served, so identifying every creditor at the filing stage remains the safest course.

This is the outcome of an individual case and does not guarantee the same result in similar matters. Some facts have been generalized to protect the parties involved.