Updated: Aug 29, 2019
The decision to file for Chapter 7 bankruptcy protection has become so momentous, so fraught with what-ifs and what-thens, that the general consensus is that it’s this act of filing that is the hard part. The papers are filed, the automatic stay is imposed on creditors, the judge and trustee are assigned, the Section 341(a) meeting of creditors is scheduled, and the debtor breathes a sigh of relief. What could possibly go wrong?
The actual discharge of a debtor from his debts in a Chapter 7 bankruptcy proceeding does not occur until, best case scenario, 60 days after the 341 meeting, which is a meeting at which the bankruptcy trustee and a debtor’s creditors can question the debtor, under oath, concerning the debtor’s assets and liabilities. In clear-cut cases, where a debtor has a relatively small amount of consumer debt and no assets, the trustee should close the debtor’s 341 meeting and promptly file a Report of No Distribution with the bankruptcy court. Then, at the expiration of the roughly 60-day period following the meeting, the debtor will receive a discharge and move ahead with the promised “fresh start.”
Often, however, the process hits a few road bumps along the way. The United States Trustee requires each case trustee to examine certain financial records, including bank statements, credit card statements, tax returns, mortgage statements, insurance policies and other documents evidencing assets and/or liabilities, for debtors whose unsecured debt exceeds $100,000. The trustee may seek these documents promptly, well before the 341 meeting, or only after meeting with the debtor. While the trustee is investigating the debtor’s finances, he will generally hold the debtor’s 341 meeting open and ask the debtor to stipulate that the time for the trustee to object to the debtor’s discharge will be extended for a certain amount of time. During that time, the court will not enter the debtor’s discharge.
This investigation has been a pitfall for more than a few debtors. Trustees often request a standard list of documents from debtors, to be supplemented by additional documents tailored to each debtor’s situation. For instance, if a debtor’s petition and schedules show an interest in a partnership, a trustee might ask for the partnership agreement. If a debtor’s petition and schedules show that a debtor has income disproportionate to his assets, a trustee might seek documentation of his income. All too often, debtors are not forthcoming with these documents. Sometimes they are actively hiding assets, and don’t want to turn over evidence of their deception. More often than not, they are simply poor record-keepers, which is part of why they’re in such dire financial straits to begin with. Other times they simply do not have the time or energy to deal with the trustee’s requests, and stall hoping that the trustee won’t bother pursuing these documents.
This is ill advised, as all three of these scenarios can, and very often do, result in the denial of a debtor’s discharge. Providing these and other documents to the trustee is an absolute requirement, and it is a valid basis for the trustee to commence an adversary proceeding objecting to a debtor’s discharge. The same is true for the debtor actively hiding assets – if the trustee can show that the debtor lied under oath (whether in the petition or schedules, at the 341 meeting, in a hearing before the court or in a deposition or other discovery papers), the debtor will surely be denied his discharge. Simply stating to the trustee that you don’t have the documents anymore, you threw them out, is not a defense to denial of discharge. Debtors have an affirmative duty to keep and maintain all financial records, or obtain them from any accountant, bank, institution, school, agency or person who might have access to them.
Here’s where things can get very messy for the dishonest or lazy debtor. If the judge decides to deny a debtor his discharge, none of the debtor’s debts will be discharged as part of that bankruptcy proceeding. Furthermore, any debts the debtor attempted to discharge in that proceeding will never, ever be dischargeable, even in a future bankruptcy proceeding. And, if the debtor has assets, they might still be liquidated to pay the debtor’s creditors, including the trustee and his attorneys, who expended a lot of money seeking documents from the debtor and litigating the objection to discharge action. Sometimes it doesn’t even end there – for very egregious cases, the debtor may actually be prosecuted for bankruptcy crimes.
The moral of this story is that it ain’t over until the discharge is entered. Simply filing a bankruptcy petition does not absolve you of your obligations, and in fact creates new ones, to the trustee and the court. The petition and schedules are statements under oath. Lying (or not being thorough) on these documents is perjury, and sometimes even fraud.
Attempting to hide assets from a trustee is not a good idea. True, trustees have mountains of cases to review every month, but they each have systems in place to weed out potential fraud and asset cases. One trustee in the Southern District of New York recently reviewed a case where the debtor disclosed that he was an “employee” of a company, but did not disclose that the company was actually registered to his home address. His petition and schedules did not reflect any ownership interest in the company, but the trustee had to investigate. As it turns out, the company is not profitable and it is not a valuable asset of the debtor’s estate. However, because the debtor dragged his feet getting documentation concerning the company to his trustee, the trustee was forced to bring an objection to discharge action against the debtor. In the end, the debtor produced sufficient documentation and was able to obtain his discharge, but not before his attorney and trustee and the court itself jumped through hoops of fire. The judge had to set down a date certain for the debtor to comply with the trustee’s requests or else the judge would “seriously consider” a motion for a default judgment denying the debtor’s discharge – generally not something this judge would be willing to do. That’s how close this debtor came to losing his discharge – and all over the (possibly inadvertent) omission of a worthless ownership interest in the bankruptcy petition and schedules.