April 1, 2020

Bankruptcy Courts Increasing Scrutiny of Bankruptcy Schedules

The past few years have amounted to something of a tranisition period in the bankruptcy world.  In October, 2005, the bankruptcy law changed, requiring debtor lawyers to learn and apply new law and to change office procedures to address new filing requirements.  In the months preceding October, 2005, filing rates zoomed, as families concerned about the uncertainty of the new law filed while the older, more lenient rules applied.

In the months following October, 2005, bankruptcy filing rates dropped dramatically.  Most of the people who were thinking about filing had already done so.  Many bankruptcy lawyers discontinue the practice area because of the changes in the law.  And uncertainty about how the law would be applied and mis-information about the availability of bankruptcy relief kept the numbers down.

Now, in mid-2008, things have changed dramatically.  Debtor law firms are fully up to speed about procedures under the bankruptcy laws and bad economic times have resulted in record numbers of filings.

One of the less publicized changes in the bankruptcy universe after 2005 is the increased scrutiny that debtors will face regarding their schedules.  With filing numbers up and bankruptcy hearing and court rooms crowded, the bankruptcy process may seem almost informal.  However, if you are thinking about bankruptcy you should remember that everything you submit to the bankruptcy court is subject to your oath of truthfulness.  There can be dire consesquences if the information on your schedules is not accurate.

Massachusetts bankruptcy blogger Bill McLeod gives us an example of what can happen if you are not very careful in revealing on your bankruptcy schedules full details of your financial affairs.   Bill writes in his informative blog about a case filed pro se (without an attorney) by a debtor who was a former lawyer.  The schedules contained numerous omissions and inaccuracies, requiring the debtor to file numerous amendments.   Several of the debtor’s creditors filed an Adversary Proceeding to challenge the bankruptcy.  During the course of the adversary hearing, the debtor disclosed that he had student loans and that he had money owed to him.

The bankruptcy judge in this case concluded that this debtor had a reckless disregard for the truth and that his discharge should be denied.   As Attorney McLeod points out, a denial of discharge does not end the case.  The trustee may still gather and sell assets.  At the same time the debtor’s debts will not be forgiven – in other words, the debtor ends up with the worst of two worlds.

We have seen other situations where the court disallowed exemptions, meaning that the debtor not only lost his discharge, but he was not allowed to claim exemptions to keep personal property like clothes and basic household necessities.

This is not to say that you cannot amend your schedules if you legitimately forgot something.  However, if the trustee or creditors sense a pattern of deception, that’s where the trouble begins.

While these denial of discharge or disallowance of exemptions is rare, you need to be aware of the consequences of lying to the court.  If you are not sure about whether to mention something to your lawyer, err on the side of disclosure.  Bankruptcy lawyers use detailed questionnaires for a reason – we want to make sure that we have a complete picture so we can advise you properly.  Work with us to avoid surprises, especially unpleasant surprises.