Debtor Loses Opportunity to Discharge Nearly $3.5 Million in Debt Because of Poor Record-Keeping

The Seventh Circuit U.S. Court of Appeals recently upheld a bankruptcy appellate panel’s decision to affirm a bankruptcy court’s ruling denying a Chapter 7 debtor the discharge of nearly $3.5 million in unsecured debt. The rulings were based on the debtor’s failure to keep virtually any records of his financial activity in the years preceding his bankruptcy filing, as well as his inability to explain the excessive losses that he claimed through his real estate investments.

records-1552781The Debtor Had 27 Income-Producing Properties and Was Broke with $3.5 Million in Debt Three Years Later

According to the decision, the debtor started investing in real estate for himself in 2006, and by 2007 he had 27 rental properties. By the time he filed for bankruptcy in 2010, he only owned five of those properties, and they were all upside-down in debt. After his filing, the bankruptcy trustee requested records to describe the rents received by the debtor for these 27 properties, as well as to explain the specifics of the acquisition, financing, and disposition of the properties that he no longer held. The debtor was unable to submit an intelligible response to the trustee’s request, and the trustee asked the court to deny the debtor’s requested discharge without a trial.

Record-Keeping Requirements in the U.S. Bankruptcy Code

Under the United States Bankruptcy Code, a U.S. bankruptcy court is permitted to deny a discharge to a Chapter 7 debtor if the debtor has “concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information from which the debtor’s financial condition or business transactions might be ascertained, unless such an act or failure to act was justified under all of the circumstances of the case.” A bankruptcy court may also deny a discharge if “the debtor has failed to explain satisfactorily any loss of assets or deficiency of assets to meet the debtor’s liabilities.” It can be said that these rules are designed to discourage and prevent bankruptcy debtors from fraudulently or dishonestly manipulating their finances before filing for bankruptcy in order to claim they have no assets, when in reality some assets are being temporarily hidden or held for the debtor until the debts are discharged.

The Courts Rule that the Debtor Failed to Meet His Record-Keeping Responsibility

All three of the courts that issued decisions in this case agreed that the debtor’s failure to keep (or disclose) the records of his rental properties and the rest of his assets was not in accordance with the U.S. Bankruptcy Code, and his request for the discharge was not even brought to trial. The man will be forced to live out his life with the $3.5 million in unsecured debt. A lesson to be learned from this case is the importance of record-keeping throughout your business ventures, and also the importance of discussing your case with a qualified bankruptcy attorney before you file. Many records can be obtained even if you do not know they exist, and there are exemptions available that can allow you to keep some property without attempting to hide anything.

Are You Considering Bankruptcy?

If you or a loved one may benefit from bankruptcy, make sure and have your case prepared properly by a qualified bankruptcy attorney so that all the requirements for discharge are met without needing an appeal. The skilled Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center will work diligently in your best interests and help you get on the road to financial independence. At the Schwartz Bankruptcy Law Center, our skilled attorneys and staff work with, advise, and represent clients in various bankruptcy proceedings. With our experience to guide you, you can decide what works best for you and become financially independent again. Call 866-366-3328 today to schedule a risk-free consultation or contact us through our website.

More Blog Posts:

Ex-NFL Player Clinton Portis Using Chapter 7 Bankruptcy to Address $5 Million in Debt, Kentucky Bankruptcy Lawyers Blog, published January 13, 2016.

Court Lifts Automatic Stay in Chapter 7 Bankruptcy Proceeding Based Upon Accusations of Fraud, Kentucky Bankruptcy Lawyers Blog, published December 26, 2015.

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