McLeod Law Offices

In January, the 8th Circuit Bankruptcy Appellate Panel affirmed a bankruptcy court ruling that revoked the discharge of a debtor who kept his tax refund. The debtor filed his petition on October 10, 2005 and his meeting of creditors took place about one month later. At that meeting, the chapter 7 trustee advised the debtor not to spend any tax refund without contacting the trustee. The trustee gave the debtor a handout which read in part:

Warning: Do not spend any of your tax refunds until you have received approval from my office, even if you have received notice from the Bankruptcy Court that a bankruptcy discharge has been entered. The bankruptcy discharge does not close your bankruptcy case or eliminate your need to turn over non-exemption assets.

Failure to comply with the terms of this letter or to cooperate with me in the administration of your bankruptcy estate may constitute cause to revoke your bankruptcy discharge. You will receive only one notice from my office of non-exempt monies due your bankruptcy estate and upon non-compliance, I will seek to revoke your discharge.

The debtor received his discharge in January of 2006, and in February he filed his tax returns. His refunds totaled approximately $3,500, which was spent on living expenses.

In June of 2006, the trustee filed a motion to seek a Rule 2004 examination (which is similar to but not the same as a deposition) of the debtor. The trustee also requested that the debtor produce the 2005 tax returns. Debtor produced the returns, but did not appear for the examination. Later in June, the trustee made demand for $1,556.11 of the tax refunds: the amount of non-exempt assets that belonged to the bankruptcy estate. The debtor failed to do so.

In July, the trustee sought an order from the bankruptcy court seeking again to examine the debtor under Rule 2004 and requesting that the debtor bring the $1,556.11 to the examination. Debtor did not attend nor did he pay the amount.

The US Trustee filed a complaint seeking a revocation of the discharge for knowingly and fraudulently failing to deliver the refunds to the chapter 7 trustee. Debtor offered many reasons for why he spent the refunds, but those excuses were not believed. The debtor was warned, and in spite of the warning, spent the money. The discharge was revoked….all for $1,556.11. The case is Fokkena v. Klages, 8th Cir. BAP, 07-6051 SI.

Thinking about filing bankruptcy? Do you have a paper shredder or know a friend with a dumpster? You should know that a US Bankruptcy Court judge in Boston recently ruled that a Chapter 7 debtor was not entitled to a discharge because documents had been destroyed.

The case involved a carpenter and homebuilding contractor who operated under a corporate entity. The corporation had employees and handled large projects involving hundreds of thousands of dollars. While perhaps a good contractor, the debtor was not a savvy business person but that did not stop him from being the record keeper for the company.

The business records were kept in a large plastic bin which included canceled checks, copies of contracts and even some personal records. He did not maintain a cash flow ledger for the company.

In 2004, the company started to face cash flow problems which eventually snowballed. He and his company were forced to abandon projects they had been paid on and he expected to be sued. The debtor consulted a bankruptcy attorney. By 2005, the debtor became seriously depressed about the company’s financial problems so much so that the mere site of the plastic bin made him sick. The Court noted that “sometime between December 2004 and February 2005, he relieved himself of this immediate problem by driving the bin to, and depositing it in, a dumpster belonging to a roofing contractor friend.”

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Last week, the US Bankruptcy Court in the Western District of Kentucky ruled that a Chapter 7 debtor’s credit card debt was not dischargeable because the debtor used a card that should have been closed. The debtor and the plaintiff divorced in 2003 and as a part of the divorce, the parties agreed to pay their own credit card debt as well as hold each other harmless in the event of default.

The husband and wife had a joint Fleet Visa which was to be paid by the husband. He paid it in April of 2003. The debtor/wife remarried in December of that year and she changed her name. That marriage only lasted a year, but the wife again married and again changed her name.

In 2004, Fleet was bought by Bank of America and issued a new credit card on what was formerly the Fleet Visa account. The debtor used the card, and when the bills arrived, the bills were addressed to her former ex-husband and the debtor using the name she had while married to him. She never notified the bank she was divorced or that her ex-husband’s name should not be on the card.

In 2006, after some business problems and an illness, the debtor filed bankruptcy. The husband sued claiming that the debt was not dischargeable on the basis of fraud. He argued that the debtor knew that she was using a card that was in both their names.

Debtor claimed that she did not know that the husband’s name was still on the account – and that because she had so many other bills at the time, she had no idea it was a joint account. However, this explanation did not make sense since the husband’s name was on the card, and on the bill, and the bills were in a name she used two marriages ago. She also had to reactivate the account, and thus had to have known at that time it was a joint account – as well as in her former name. Even “[i]t was not done knowingly,” the court wrote, “it certainly was done with gross recklessness.”

Because debtor did not take some very simple steps to change the holder of the account, the debt is non-dischargeable, and because of the hold-harmless language of the settlement agreement, she must pay it. Based on these facts, shouldn’t the debtor have known better?