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How Bedroom Secrets Can Derail Your Bankruptcy Case

bankruptcy discharge denial fraudWhen you file for Chapter 7 bankruptcy there are a ton of disclosures you need to make. I call it the quid pro quo of bankruptcy – in order to get the protection of the court in Chapter 7, you’ve got to be prepared to give up information. It may be a pain, but overall it’s a fair trade-off.

But what if you play fast and loose with the bankruptcy court? Maybe you don’t reveal a few bucks of “under the table” income or that lovely Persian rug that’s in the living room?

You could end up walking out of your Chapter 7 bankruptcy without a discharge. What’s more, it could happen without any action on the part of the bankruptcy court or your Chapter 7 trustee.

Hell Hath No Fury

Most people think the bankruptcy process is overseen by the trustee and the court to the exclusion of the rest of the world. To some extent that’s the case, but the hidden player is … the rest of the world.

Let’s say you’ve gone through a particularly messy break-up. A friendship, marriage, business partnership, whatever. You didn’t do anything wrong in connection with the break-up, but during the relationship you told the other person about something you’d now prefer, as a debtor in Chapter 7 bankruptcy, to keep quiet.

Something along the lines of how much you’re making off the books as a cocktail waitress at the local bar. Or about how much money your business customers are paying in cash.

When you file your Chapter 7 bankruptcy case, the other person catches wind of it. They think you’re not such a great person, and they want to do whatever they can to derail your bankruptcy case.

Under the U.S. Bankruptcy Code, the court can deny a discharge if you make a false statement or omission in connection with your bankruptcy case about a material fact, and do so knowingly and fraudulently. And the “big reveal” need not come from the trustee or the court.

Your ex-spouse, ex-lover, ex-business partner can derail the process.

Outsiders As Volunteer Fraud Sniffers

In the case of Khalil v. Developers Surety and Indemnity Co. (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007), the court noted that “the fundamental purpose of § 727(a)(4)(A) is to insure that the trustee and creditors have accurate information without having to conduct costly investigations.” (quoting Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP 1999)).

That makes some sense, if you think about it. The Chapter 7 trustee doesn’t really know if you’re telling the truth, nor does the bankruptcy court. If there’s someone out there with better information about potential shenanigans then there has to be a mechanism to allow them to come forward and be heard.

The Fix

The old rule we bankruptcy lawyers live by is, “disclose, disclose, disclose.” Usually we’re looking out for problems with the Chapter 7 trustee and the judge, but occasionally it’s the wronged ex-spouse. Someone shows up to the meeting of creditors and starts asking questions you don’t want to answer, and the whole Pandora’s Box opens up.

If you’re thinking about filing for bankruptcy, take it from me – it’s better to be up-front about everything so your lawyer can counsel you accordingly. Because once you’re neck-deep in the process there’s no going back.

And you never know what bedroom secrets will come to light.

Image credit:  DrJohnBullas

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By |October 7th, 2011|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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