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Posted by: Walter Metzen
Last updated Oct. 30, 2017.
In the vast majority of cases, the bankruptcy discharge is the primary reason debtors enter the Bankruptcy Court. After all, people file bankruptcy to get rid of debt, and a federal court order is certainly an effective way of making this happen. However, receiving a bankruptcy discharge is not guaranteed, debtors are required to follow the rules and act in good faith if they expect to have their case go smoothly.
Grounds for Objecting to the Bankruptcy Discharge
Bankruptcy offers protection to those who are honest and punishes those who try to game the system. Section 727 of the Bankruptcy Code sets out a number of reasons a creditor or trustee can object to a debtor’s discharge and most center around lack of transparency.
If you’re planning on filing for bankruptcy, be prepared to lay all your cards on the table. Section 727 allows for the challenge of a discharge under the following circumstances:
- Trying to defraud a creditor, the debtor concealed or transferred property within one year before filing (this includes transferring property that is part of the bankruptcy estate once your case has been filed);
- The debtor has destroyed records or failed to keep adequate records;
- The debtor has lied under oath;
- The debtor can’t explain a loss of assets, in other words they can’t give a good reason why property they previously owned is missing or unaccounted for.
Be Honest with the Bankruptcy Court
When you walk into your first bankruptcy consultation, the focus is mainly on debt. You have debt, don’t see a way out, and are looking to a professional for guidance. The bankruptcy attorney sitting on the other side of the desk is certainly going to give you guidance on how best to deal with that underwater mortgage or high credit card balances, but they’ll be equally concerned with what’s in your garage, on your wife’s finger, and whether you’ve transferred assets to family members recently.
In other words, bankruptcy is about assets as much as it is about debts. When you file bankruptcy, you swear under oath that you have told the Bankruptcy Court about everything you own. Similarly, your attorney represents that, to the best of his or her knowledge, your filed papers are accurate. These promises have meaning and there are consequences if they are broken.
Tough financial times cause stress and people aren’t always at their best when they’re stressed out. No matter how bad of shape you might be in, don’t try to game the system — make sure you tell your bankruptcy attorney everything. Failing to disclose an asset can result in a creditor or bankruptcy trustee objecting to your discharge and they have their ways of finding property. Similarly, giving away or concealing property before filing puts your discharge in jeopardy.
Bankruptcy Trustees Will Investigate
Remember, bankruptcy trustees essentially work for your creditors and make money by keeping 25% of all the property they’re able to sell. If the trustee suspects that you might have left assets out of your bankruptcy papers, they will schedule a 2004 exam and ask you questions under oath. It’s not a pleasant experience.
If evidence confirms that you might have concealed or intentionally transferred property before your bankruptcy case, you’ll be sued. If your discharge is denied for fraud your case will still be administered, meaning you’ll lose all non-exempt assets without any debt relief. The property you tried to hide will be sold and you’ll leave Bankruptcy Court owing all your old creditors.
In severe cases, omissions on bankruptcy schedules can rise to the level of criminal activity and result in prosecution. People do go to jail for bankruptcy fraud.
If you’re thinking of filing for bankruptcy, be sure to obtain the services of a qualified bankruptcy attorney in your state. It could mean the difference of having your bankruptcy denied or getting a discharge.
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Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.