It’s a question I am asked often:
“Do I need to list this on my bankruptcy petition?”
The answer is always “yes.” The rule of thumb, actually the only rule is to list and disclose everything.
In a May 24, 2006 decision from the US Bankruptcy Court in Boston, a debtor learned what happens when you do not list and disclose everything: the discharge order was revoked.
The Facts
Debtor filed his bankruptcy petition in September 2001. Within the 3 month period before the filing of the petition, the debtor transferred a lot in exchange for a promissory note, as well as a mortgage that the debtor held. The note provided that the debtor would be paid $250 per month in interest, which the debtor was paid for the 3 months prior to the filing of the petition. The debtor then assigned the note and the mortgage to a bank as additional collateral for a debt that the debtor already owed the bank.
When the debtor filed his Schedules, as well as the Statement of Financial Affairs, the debtor did not identify (1) the transfer of the property; (2) the transfer or assignment of the mortgage and the note; (3) the interest income derived from the note in the three months prior to filing; and (4) that money was owed to him on the note, i.e., an “accounts receivable.” While the debtor identified the bank’s secured claim, he did not identify the additional collateral that had been assigned to the bank, i.e., the note and the mortgage.
In April 2002, debtor received the discharge. Two months later, debtor learned that the lot had been sold, and that the note could be paid. Shortly thereafter, after the bank deducted its proceeds, the debtor received over $27,000 payable to him and another. However, that money belonged to the Chapter 7 Trustee and ultimately debtor’s creditors.
But I told my Lawyer!
Debtor claimed that the property information did not need to be listed based on advice of his counsel. Debtor did disclose the identity of the lot to counsel. However debtor never told his attorney that he sold the property, took a promissory note and mortgage, received income from the note, or assigned the note and mortgage to a creditor. Debtor reviewed the petition and the schedules, admittedly by just “perusing it.”
Debtor also attempted to argue that he did not list this information because he had a good faith belief that the property had no value. But the court noted that if there truly was no value, “there is simply no reason not to list it…[t]he only reason not to list the property would have been the possibility that (a) the Debtor might be able to sell the property for value and (b) his failure to list it might escape detection.”
In this case, the debtor not only did not list the transfer, he did not list the income derived from it (the interest income), he did not identify the note and the mortgage, and he did not properly describe the secured claim of the bank. Based on all of this, the court did not believe that debtor’s claim that he did not know about the obligation to disclose the information.
Discharge Revoked
Under Section 727(d)(2) of the Bankruptcy Code, a provision unaffected by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the court shall revoke a discharge if the debtor “acquired property that is the property of the estate ….and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.” Debtor’s only argument in this case was that he did not “knowingly and fraudulently” fail to report the proceeds of the sale.
The court construed “knowingly” as proof that debtor’s “failure was accompanied by knowledge that the property… belonged to the estate and that he was obligated to report or surrender it to the Trustee.” “Fraudulently” requires the specific intent to defraud the estate or the Trustee.
Taking all of the facts into account, specifically all of the failures to disclose any information concerning the property, including all information incidental to the transfer, the court determined that the debtor’s actions were knowingly and fraudulently. As a result, the debtor’s discharge was revoked.
No Benefit to Debtor
There is no benefit to starting the Chapter 7 process if the goal is anything other than obtaining (and retaining) a Chapter 7 discharge. In this case, this debtor did not disclose important information to his attorney, the court and the Chapter 7 Trustee, presumably because he knew what the consequences were. In effect, he wanted to have his “cake and eat it too.” Unfortunately for this debtor, one very bad decision has resulted in no cake…and no discharge. Personally, I do not understand why at the very least, all facts were not disclosed to his attorney. People contemplating bankruptcy need to make complete and truthful disclosures. One of the prices that can be paid is the revocation of the relief sought in the first place: the discharge.
Related posts:
- Failure to Turnover Tax Refund Leads to Discharge Revocation
- Unauthorized Post Petition Transfer Leads to Denial of Discharge
- Inaccurate Schedules Lead to Discharge Denial
- Debtor Can’t Reopen Case to Enforce Discharge. Yet.
- Not Huge and Very Stupid: A Discharge is Denied
Tags: Bankruptcy