Tag Archives: Fraud

What Happens if I Do Not Disclose All Assets in my Bankruptcy Petition?

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When you file for bankruptcy you are obligated to disclose all of your assets and all of your debts in your bankruptcy petition truthfully and under penalty of perjury. Failure to disclose may have many negative consequences such as the trustee in a Chapter 7 bankruptcy case liquidating your undisclosed asset and providing it to your creditors or the denial of a bankruptcy discharge. A debtor can also be sentenced to prison and fined. Just ask ex-Philly baseball player Lenny Dyskstra. Mr. Dykstra was sentenced to six months in federal prison and ordered to pay $200,000 in restitution in 2012. This article focuses on less substantial bankruptcy fraud.

You must disclose all of your assets when filing for bankruptcy.

You must disclose all of your assets when filing for bankruptcy.

Take the case of In re: Gronlund (No. 13-1566, B.A.P. 9th Circuit, August 2014). In this case, Mr & Mrs. Gronlund filed for Chapter 7 bankruptcy protection. They were overly detailed in listing their personal property, down to where their pots and pans were listed in their house. They did not list their interest in real estate in Mexico. The Ch. 7 trustee noticed income on their tax returns that was not disclosed in their bankruptcy petition. During their 341 meeting of creditors, Mr. Gronlund admitted to receiving $2,500 in interest only payments each month from the note derived from the Mexican property (“Mexican Note”). Mr. Gronlund testified that he did not think to list the Mexican Note because he already sold the property to a Mr. Rezai. Mr. Gronlund was not consistent on where Mr. Rezai lived. The trustee continued the meeting of creditors to give the Gronlunds an opportunity to amend his schedules. The Gronlunds never did so and the trustee filed an adversary complaint to deny the Gronlunds their bankruptcy discharge under 11 U.S.C. §727(a)(2)(A) and (a)(4)(A) indicating the Gronlunds concealed their interest in the Mexican property and making false oaths. The Gronlunds filed their amended schedules after the adversary complaint was filed. The schedules indicated that even though the Gronlunds have an interest in the Mexican Note, the Note had more encumbrances than it was worth (the Gronlunds indicated the Note was worth about $450,000 and the encumbrances were around $470,000). There were no proof of claims filed for the encumbrances and Mr. Gronlund tried to introduce documents that he believed would prove the existence of the encumbrances, but the bankruptcy court did not find the documents credible. A Special Mexican Real Estate Counsel testified for the trustee indicating that there were no encumbrances recorded against the Mexican property and that the property was actually worth about $530,000. Mr. Rezai consistently paid the Gronlunds $2,500 every month for the past four years. For the Gronlund’s defense, Mr. Gronlund indicated he was very stressed during that time due to family illnesses, supporting injured family members, had to testify as a witness in a trial that was prosecuting his friend for murder, and business losses. He hired an affordable bankruptcy attorney and asked his bookkeeper and employee to assist in his bankruptcy case rather than take care of it himself. He indicated his bankruptcy attorney received all the information and already told the attorney to fix the first two drafts. He did not review the third draft because he thought his bankruptcy attorney had everything fixed and all his schedules were accurate.

Pursuant to 11 U.S.C. §727(a)(2), a debtor will not receive a discharge if he has concealed property within one year before filing of the petition or property of the estate after filing the petition with the intent to hinder, delay, or defraud a creditor or an officer of the estate. The bankruptcy court indicated the Gronlunds concealed the Mexican Note because they failed to list the asset in the initial schedules, didn’t list the $2,500 payments, being evasive at the meeting of creditors and later claimed that the Mexican Note was over-encumbered. The bankruptcy court based their findings of the Gronlund’s intent to hinder, delay or defraud based on their conduct and circumstances surrounding the filing of the petition and how they acted afterwards. Given the Gronlunds were very sophisticated in business it was very suspicious the only thing left out of the schedules was their only asset with significant value.

Pursuant to 11 U.S.C. §727(a)(4)(A), a debtor will not receive a discharge if they “knowingly and fraudulently, in or in connection with the case made a false oath or account.” The bankruptcy court indicated that the Gronlunds failed to list the $2,500 payments received and failed to list the Mexican Note in their schedules and meeting of creditors. Since the note was a valuable asset worth between $450,000 – $530,000, the fact was very material in the case. Failure to list this as an asset was detrimental to the estate. The court believed the Gronlunds knowingly made those statements since they revised two previous drafts of the petition and just didn’t review the third one, especially when the $2,500 was a significant amount of their monthly income. The bankruptcy court also believed that the Gronlunds had the fraudulent intent to deceive their creditors and therefore denied the Gronlunds discharge. The Gronlunds appealed the bankruptcy court’s ruling but the 9th Circuit Bankruptcy Appellate Panel agreed with the bankruptcy court’s rulings.

The moral of the story is to always disclose everything to your bankruptcy lawyer and in your bankruptcy petition. You may think that an asset is not worth anything or that something is not important enough to disclose to your bankruptcy attorney. Something may seem insignificant to you but may have huge consequences in your bankruptcy case.

Can I Go On Vacation Before Filing Bankruptcy?

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How do you have money to on vacation but no money to pay your debts? In case you did not know this previously I am going to let you in on a not so secret rule in bankruptcy: it is generally not a good idea to go on vacation right before filing for bankruptcy. Doing so may look like and be an abuse of the bankruptcy process and your case may be dismissed or the discharge of your debts denied.

Pursuant to 11 U.S.C. §707(b)(1) the court may dismiss a case “if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Whether the court finds abuse depends on the circumstances of each case. If the circumstances are the fact that you really needed to have a vacation (with no other explanation) then it probably does not bode well for your bankruptcy case. Essentially you are taking a vacation at the expense of your creditors that you are alleging you cannot afford to pay anymore. Rather than paying for your vacation you could have used those funds to pay some of your creditors. If you are going out of town for a legitimate reason, such as work related reasons (for example, you have to pay all the expenses yourself but your employer will reimburse you in the future) or if there are family emergencies (for example, a loved one is very sick, or you are going to a funeral) then you can explain those reasons to the judge to dispute the motion to dismiss or claim of abuse. If a motion to dismiss is filed in your case pursuant to §707(b), it is highly advisable that you seek the services of a bankruptcy lawyer to help you oppose the motion.

It is generally not a good idea to go on vacation before filing bankruptcy.

It is generally not a good idea to go on vacation before filing bankruptcy.

If you used your credit cards during the vacation right before filing your case the problem may gave just become worse. Creditors could file an adversary proceeding against you to have that debt or all of your debts be deemed nondischargeable pursuant to 11 U.S.C. §523(a)(2) due to fraud or 11 U.S.C. §727. An example of fraud is if you rack up your credit card debt for luxury goods within 90 days prior to filing for bankruptcy. What are considered luxury goods? Luxury goods are anything that is not reasonably necessary for the support or maintenance of you or your dependents. Going on vacation, big screen TVs, electronics, nice purses, jewelry or shoes may be examples of luxury goods.

You may be asking yourself: “How does the United States Trustee or a party in interest find out you went on vacation or spent money on luxury goods?” There are a variety of different ways they may find out. Most Chapter 7 trustees require that your Bay Area or San Jose bankruptcy attorney submit bank statements as part of the documents to be sent to the Chapter 7 trustee after your bankruptcy case is filed and before your meeting of creditors. Even if you paid for your vacation with cash or by debit card from your checking account, the Chapter 7 trustee will see the transactions at the location you are withdrawing the money (for example, if you withdrew cash out of the ATM in Hawaii, it will show cash withdrawal in Hawaii). Or if you withdraw a huge chunk of cash prior to going on vacation the Chapter 7 trustee may question what the huge chunk of cash may be used for. Of course, if you are using your credit cards, it will show up on your credit card statement. If the Chapter 7 trustee finds something suspicious from the documents provided he or she may inform the United States Trustee. The United States Trustee is normally the one who will file motions to dismiss your case for abuse of the bankruptcy process under 11 U.S.C.§ 707. Other parties in interest (i.e. your creditors) may also have the right to file an objection based on abuse of process under 11 U.S.C.§ 707.

Why would buying luxury goods on your credit card before filing bankruptcy be considered fraud? It is presumed to be fraud because it looks like you are taking advantage of your creditors. If you know you are going to file for bankruptcy and you max out your credit card balances it is considered fraud because you “borrowed” the money without ever having any intention of paying the money back. Of course, buying luxury items within the 90 day window is only presumed to be fraud, but you can always dispute the presumption by providing proof that at the time you used the credit cards you had every intention of paying the money back. You can show this in several ways: providing evidence that you have been making your payments every month, providing evidence that you had funds to pay back the credit at the time you made the purchases, or anything else that proves you had the intention of paying back the debt. If something happens afterwards that changes your financial situation such as a decrease in pay or loss of job that makes filing for bankruptcy a necessity you can explain that situation to the judge to dispute the presumption that you committed fraud. You should consult with a bankruptcy attorney to help you if you have an adversary proceeding filed against you for nondischargeability of a debt due to fraud.

Can Debt Settlement Companies Help Me With My Debts?

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Many consumers today are struggling to make ends meet. They live from paycheck to paycheck and have creditors hounding them to pay for debts with money they do not have. It does not help that they are bombarded with radio ads and television commercials promising to help them settle their debt for pennies on the dollar. The consumers see or hear these ads and think they have found the solution to their problems. But do these debt settlement companies really live up to their promises and actually help consumers? According to the U.S. Government Accountability Office, their investigations have found that a lot of these debt settlement companies use fraudulent and deceptive practices and poses a significant risk to consumers. As a bankruptcy lawyer I have heard many horror stories and I want to highlight some of the dangers of these debt settlement companies. Hopefully you will be able to make an informed decision on how you can manage your debt.

Settle for Pennies on the Dollar

The claim that these debt settlement companies can settle your debt for pennies on the dollar is the main draw for most consumers when they hear this. They think that they are getting the deal of a lifetime. They are willing to pay some company to help them settle their debts and pay a monthly sum to do so. The problem with these claims is that in order to settle the debt these debt settlement companies advise you that you have to stop making your monthly payments first. If you were paying these companies on time and you suddenly stop, your interest rates will increase and you will soon have penalty and late fees tacked on to your balance. Additionally, not all creditors are willing to participate in these debt settlement programs, so you will have to deal with the nonparticipating creditors on your own. For the creditors that are willing to settle the debt with the debt settlement companies, the next issue is how much are they willing to settle for. Contrary to the debt settlement company’s claims, not all creditors are willing to settle for pennies on the dollar. It depends on the amount of debt you owe and how desperate the companies are to settle. In most circumstances you could have settled the debt on your own for the same amount without having to pay a debt settlement company to do it for you.

Be Debt Free in “X” Months

Debt settlement companies promise that if you pay a certain dollar amount to them every month for who knows how many months you will be completely debt free. The number of months can vary depending on the amount of debt. The most common debt settlement program takes the money you pay them and puts it in a separate account. Every time there is enough money in the account they can then try to settle one of your debts. In the meantime the credit cards that are not getting paid continue to increase the balanced owed with interest and late fees. Eventually one the credit card companies will sue you. I had a client that came into my office crying because she was promised that she would be debt free if she paid $1,000 a month for 36 months on her $60,000 debt. She did not receive a statement from the debt settlement company during the 30 months she paid the $1,000. Later she requested the debt settlement company provide a statement to her so she could see how much debt she still owed. She thought she was almost done with the program since she only had 6 more months to go. To her surprise, the balance she owed on her credit cards was HIGHER than when she first started the program. This was after she had already paid $30,000 into the program. Where did her money go? She was out $30,000 and her debt situation did not improve. In fact, her situation had gotten worse. She should have spoken to a bankruptcy attorney and save herself $28,000.

Avoid Bankruptcy

The debt settlement companies make filing for bankruptcy look like the worst possible solution to a consumer’s debt situation. They do not tell you that their debt settlement program will ruin your credit because you are paying less than what you owe on a debt. The really horrible part is that some debt settlement companies also file bankruptcy cases for their clients. So first they tell potential clients that bankruptcy is bad and you would try our debt settlement program. Then when the debt settlement program does not work after collecting months of fees, the debt settlement company markets the client to use them to file bankruptcy and make all the debt go away forever. These debt settlement companies are just bleeding clients dry from all sides. Additionally, if you settle a debt for less than what you owe you can receive a 1099-C and be required to pay taxes on the money that was forgiven or cancelled. That diminishes much, if not all, of the savings you gained by settling the debt. When you file for bankruptcy you will not have to pay taxes on the amount discharged..

Nonprofit Agency

A lot of debt settlement companies claim they are nonprofit agencies, but you need to verify they are actually nonprofit. Just because they say they are nonprofit doesn’t actually mean they are.

So what are some alternatives to debt settlement programs? If you only owe a couple of creditors the best thing you can do for yourself is to try to negotiate with the creditors by yourself. You can save yourself a lot of headaches and money by doing it yourself. Yes, it does take a little bit more of your time, but at least you don’t have to pay any money for it. If you owe a lot of creditors or if the creditors are not willing to settle for an amount that you can repay comfortably, bankruptcy is another option. Bankruptcy discharges all of your eligible debts forever by federal court order and gives you a fresh start. You can consult with a credit counseling agency approved by the U.S. Trustee for more ways to manage your debt.