Failure to Disclose Assets Lands Chapter 7 Debtor in Prison
Sunday, June 6th, 2010
Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts. This particular debtor used Chapter 7 to discharge over $1 million in liabilities.
I bring this case to your attention for several reasons. First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets. While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.
In the Texas debtor's case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.
These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents. Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a "poison pen" letter to the trustee will allegations about improper activities by a bankruptcy debtor.
Second, be aware that Chapter 7 trustees and the U.S. trustee like to pursue fraud cases periodically to send a message to debtors and debtors' lawyers that the trustees are paying attention. Bankruptcy lawyers may be tempted to say "don't worry about it," to avoid extra expense and complication but playing fast and loose with disclosure rules can create major problems for both debtors and their lawyers.
Occasionally I meet with a client who may say something like "between you and me, no one knows this but…." This type of statement is the last thing that any bankruptcy lawyer wants to hear. From my perspective that client is really saying "I am thinking about committing a federal crime and I want you to help me." My license to practice law is not worth the fee for any one case and I have and will continue to decline representation for any client who wants to use my office to file inaccurate schedules.
Nobody likes to surrender assets, especially in a bankruptcy case that may have come about because of factors beyond one's control (such as a layoff, unfair treatment by a lender, a lawsuit judgment that you did not know about). In most bankruptcy cases you will not lose in assets. However, losing a few hundred or thousands of dollars is a far better fate than federal prison.
Earlier this month the U.S. Supreme Court heard arguments in a case involving the question of discharge of student loans in a Chapter 13 case. The case arose from a Chapter 13 petition filed in 1992 by Francisco Espinoza, an American Airlines baggage handler.