Keeping good financial records is always a good idea and if you’re filing bankruptcy, having good records on hand will help your case go smoothly. As married debtors in the Western District of Pennsylvania recently learned, not having them can lead to a denial of the Chapter 7 discharge.
The debtor, who was described as a “vintage automobile enthusiast who restored such vehicles and sold them to third parties,” was also the sole shareholder and president of a start-up company. The company borrowed (and he and his wife personally guaranteed) about $1.4 million. To obtain the loans, the debtor and his wife prepared financial statements.
According to the financial statements prepared in 2003 (which were signed with the acknowledgment that false statements could lead to criminal prosecution), the debtors stated that they had personal assets that totaled $2,185,000 and that their liabilities totaled only $328,000. The assets include a homestead worth $550,000, household goods and furnishings that were worth $75,000 and automobiles and automobile parts that totaled $750,000. The business failed and closed its doors before it ever started operating.
By the time the debtors filed bankruptcy, they had already lost their home in foreclosure. But according to their schedules, their assets had diminished to about $32,000 while their liabilities totaled about $1.5 million. Their household goods, which were worth $75,000 were now worth only $3,026. The automobiles, which were declared on the financial statements as being worth $300,000, were now worth only $3,140. The auto parts, which were previously disclosed as being worth $450,000 were now worth only $3,200. The schedules and statements also showed other discrepancies and raised other questions, but they are too numerous to list here. Needless to say, the US Trustee and some creditors had one very important question they wanted answered.
What the heck happened?
Section 727(a)(3) of the Bankruptcy Code precludes the granting of a discharge if
The debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records and appers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified.
The US Trustee sought to have the discharge denied on the basis that the debtors had failed to account for the loss of the assets that were listed on the financial statement filed in 2003 – only two years prior to the bankruptcy filing.
The record keeping need not be “pristine” but it should be at least such to give the US Trustee with “adequate information concerning the debtor’s financial affairs prior to entering bankruptcy. Should the debtor fail to do so, debtor must provide a justification for the failure.”
The debtors produced nothing either before or during the trial. There were not “contemporaneously-prepared books, records, or the like which would account for the drastic reduction in the value of the ….assets.” The Bankruptcy Court wrote: “It is as though the assets listed on the March of 2003 financial statement simply fell into a black hole and forever vanished.” Without more, it would certainly seem that way.
It is important to note that the US Trustee’s case against the debtors “presupposes that the asserted values of the above assets as set forth in the …2003 financial statements and the bankruptcy schedules…. Accurately reflect what they were worth at those respective times.” The Court based that assumption on the basis that the 2003 financial statement as well as the bankruptcy schedules were signed as true and correct, and that the debtors were subject to penalties if they were not.
So with no books and no records, they debtors receive no discharge.
In re Conde, US Bankruptcy Court, W.D. Pennsylvania, 07-20207, 2008.
Related: Destroyed Documents leads to Denial of Discharge
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