There is any number of ways that a debtor can get a discharge denied, and certainly, I have blogged about them here. One of the big ones is the most obvious: lying. I came across a recent case out of the Southern District of New York that should serve as a warning to all debtors – and especially to those debtors who think they can file bankruptcy without an experienced bankruptcy attorney. This pro se debtor was a former attorney (his license was suspended). There’s nothing in the record that suggests he was experienced in bankruptcy…but he still should have known better.
The case was filed in August 2006. In his original schedules, the debtor listed his monthly net income as $2,144 and expenses of $2,427. Among the expenses was $500 per month in support for “additional dependants not living” with the debtor. He also did not indicate that he had any student loan obligations, and wrote “0” in the box that specifically asks if the debtor has student loans.
A few days after filing the petition, the debtor amended his schedules showing an increase in his monthly expenses. In this amendment, he claimed that his expenses had increased, and identified a monthly domestic support obligation of $600 (and he identified the creditor to whom he owed the child support). He also stated he spent $20 per month on recreation.
Only 9 days latter, the debtor amended his schedules to identify a new creditor: a phone company who had an unsecured non-priority claim of $190.
In March 2007, the schedules were amended again. This time, the debtor added additional creditors and showed that his income was $2,840 and his expenses were $2,829. His recreation expenses were now $140 per month.
The Adversary Proceeding
A few of the debtor’s creditors challenged the discharge and filed an Adversary Proceeding. That litigation progressed and in January 2008, the creditors filed a Motion for Summary Judgment. On February 13 there was a hearing. At the hearing, the debtor disclosed for the very first time that he had student loan obligations. He claimed that he did not list them because he knew them to be non-dischargeable. It was also learned – during the adversary proceeding – that the debtor was entitled to receive a legal fee he had not disclosed. He also never really offered up any credible explanation as to why his expenses and income were fluctuating.
Section 727(a)(4) precludes a discharge if the debtor made a false oath. To show that, a creditor must prove that the debtor (1) made a statement under oath; (2) that was false: (3) that he knew was false; (4) made the statement with a fraudulent intent; and (5) the statement was related to the bankruptcy. Since a dishonest debtor is unlikely admit their dishonestly, fraud can be demonstrated by showing a reckless indifference for the truth. Once proven, the burden shifts to the debtor to produce a credible explanation.
This debtor did not understand (or perhaps – in light of his professional training chose not to care) that any debtor seeking bankruptcy protection must give a full and complete disclosure of their financial condition. No debtor is an untapped source of relevant information anxiously waiting for a question to be asked. Indeed, the questions are asked on the schedules before the case is even filed. It is the starting point of the case.
All debtors have an obligation to provide the information required by the schedules. Debtors are not at liberty to pick, choose and disclose only what they think is relevant. A debtor seeking relief under the Bankruptcy Code has an obligation to put all information out there to enable trustees and creditors to determine what rights and obligations they have. Indeed, it is only the creditors and trustees that have the role of deciding what information is relevant. “Neither the trustee nor the creditors should be required to engaged in a laborious tug-of-war to drag the simple truth into the glare of daylight.”
It’s important for me to note that I have amended schedules from time to time. A client has forgotten a creditor (even I have forgotten a creditor). An asset has been discovered (the debtor’s name appeared in the state treasurer’s unclaimed property circular), or there has been a change in circumstances. Amendments are filed by debtors attorneys every day to ensure that the disclosures are truthful, complete and accurate. The facts lead the court to believe that this debtor had something else on his mind.
It should come as no surprise that this debtor’s discharge was denied. And also, it’s important to point out that the denial of discharge does not end the case. It merely means that the debtor does not get forgiven from his debts. His non-exempt assets will still be collected and sold and his creditors are entitled to whatever dividend the chapter 7 trustee can pay from the estate. The price this pro se debtor will pay for his dishonesty will likely be very high.
In re Bressler, Bankr.S.D.N.Y., 06-11897
Related posts:
- Not Huge and Very Stupid: A Discharge is Denied
- Unauthorized Post Petition Transfer Leads to Denial of Discharge
- Debtor Can’t Reopen Case to Enforce Discharge. Yet.
- Destroyed Documents leads to Denial of Discharge
- The US Supreme Court Rules in United Student Aid Funds, Inc. v. Espinosa
Tags: Adversary Proceedings, Chapter 7, Consumer Protection, Discharge of Debts
