McLeod Law Offices

When a debtor does not fully disclose all property on Schedule B (personal property), the consequences can be harsh. A debtor recently learned how harsh those consequences can be in the recently decided 10th Circuit Court of Appeals case of Gillman v. Ford.

The debtor, who was employed as a paralegal, was seriously injured in a car accident. Shortly after the accident, she retained a law firm to represent her in bringing a claim against the other driver. Shortly after filing a complaint seeking damages, the debtor filed bankruptcy. The debtor hired a different law firm to handle the bankruptcy matter. The debtor did not tell her bankruptcy attorney about the accident litigation, nor did the debtor identify the accident claim on her schedules. The trustee filed a no-asset report (sometimes referred to as a no distribution report) and the bankruptcy case closed. Approximately one month later, the claim settled for $50,000.

The debtor claimed that she was unaware that she had to identify the claim on her bankruptcy schedules. She claimed that she learned about it for the first time just before the case settled when a paralegal told her she had a duty to do so. The debtor claimed that she immediately called her bankruptcy attorney to disclose her interest in the suit. After she successfully reopened her case, the debtor filed amended schedules identifying the settlement. She also sought to exempt all of the proceeds under Utah state law. The Chapter 7 Trustee objected to the exemption, claiming that the debtor intentionally concealed her interest in the suit, and disclosed it only after she learned she could not access the settlement proceeds otherwise.

At a hearing on the Trustee’s objection, the debtor testified that she did not disclose the claim because she did not believe she had to because any settlement was exempt under state law. She also claimed she thought she was only required to identify claims brought against her, and no claim she was asserting against others. Her testimony however, was not altogether consistent.

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The 9th Circuit Court of Appeals upheld a lower court’s ruling compelling Chapter 7 debtors to turn over tax credits to the Trustee. The credits arose from a refund for overpayment of 2001 federal and state (Arizona) income taxes. Rather than receive a refund directly, the debtors opted to have those funds applied to future tax liability. Sixteen days after making that election, the debtors filed for bankruptcy protection.

In early 2003, the debtors signed their 2002 federal and state income tax returns and applied the overpayments from 2001 to their 2002 tax liabilities. The Trustee contended that those credits from 2001 were the property of the Chapter 7 estate. The debtors argued that since they made the election, they had effectively given up their entitlement to a refund. They also contended that pursuant to Sections 6402(b) and 6513(d) of the Internal Revenue Code, the elections were irrevocable, and thus there was no interest left for the bankruptcy estate.

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People who come to me seeking bankruptcy counsel, in a way, are seeking to get to a destination. In most cases, it’s getting themselves out of the financial mess they have found themselves in. They are looking for a end point: a place where collection calls stop, where the sense of hopelessness ends, and where the future seems a bit less daunting. Many times, I have described it as similar to a Boy Scout helping someone cross the street. My job is to make sure they don’t mistake a puddle for a pot hole, or get hit by a bus. Recently, I met with someone who used a different metaphor, and I wanted to share it.

To describe it most simply and antiseptically, bankruptcy is a process by which a person or business may extricate themselves from the clutches of unmanageable debt. A client told me that he viewed it as a tool. In a sense, that is true. Bankruptcy is a powerful tool that enables debtors to regroup, reorganize and move on. He specifically mentioned a table saw. And this got me thinking.

I do not know how to use a table saw. I took shop in junior high school and made a spice rack that could only hold those small food coloring bottles, and there are only four of those. It stayed empty. In my head I had a sense of what the spice rack would look like. It didn’t turn out that way, even though my mom still hung it up in the kitchen for everyone to see (and for my siblings to openly mock me about). IIt is safe to assume that I have not used any such power tools since junior high school. Don’t laugh, but I am pretty sure – but only pretty sure – that I know what a table saw looks like. Thus, if I have the need for such a power tool, I am likely go to someone that knows how to use it (and is very sure that they know what it looks like).

The same applies for bankruptcy. In searching for a bankruptcy attorney, it’s important to find someone who “knows the tools.” Metaphorically speaking, someone who knows how the blade cuts, how the wood can jump up if it’s placed incorrectly on the table and of course, someone who remembers to measure twice and cut once. Also, as my client astutely pointed out: “I don’t want to lose a finger.” I don’t want him to lose it either.