LEGAL GUIDE
Written by attorney Shaye Larkin | Oct 12, 2010

"Truthiness" In Bankruptcy

The World English Dictionary defines “truthiness" as “the quality of being considered to be true because of what one wishes or feels, regardless of the facts." 1

Truthiness can lead to disastrous consequences if relied on by a Debtor in bankruptcy. When a person files bankruptcy, they are required to disclose many pieces of information pertaining to their financial circumstances. A Trustee is appointed who will administer the bankruptcy case by, among other things, investigating the Debtor's financial situation, reviewing the bankruptcy paperwork filed with the court, questioning the Debtor under oath, recovering assets for the benefit of creditors where applicable, and, also where applicable, collecting payments and paying allowed claims. In conducting their investigation, the Trustee will rely on a variety of sources, including, but not limited to: public records, DMV records, transfer of title records, as well as checking and savings account records. In other words, the Trustee will rely on facts to establish the truth or falsity of the documents presented by the Debtor in the bankruptcy case.

A Debtor's failure to disclose pertinent information in their bankruptcy case can result in the loss of assets, dismissal of their case, or worse, regardless of whether the Debtor honestly believed they were being truthful. If a Debtor in bankruptcy actually knows or has reason to know that the information set forth in their bankruptcy paperwork is false, they have committed a bankruptcy crime. Title 18 of the United States Code sets forth the law of what constitutes a bankruptcy crime and includes the following acts, which are punishable by fine and up to five years in prison:

Knowingly and fraudulently concealing assets belonging to the Debtor;

Knowingly and fraudulently concealing information relating to the financial affairs of the Debtor;

Knowingly and fraudulently making a false oath, account or claim;

Knowingly and fraudulently making a false declaration under penalty of perjury;

Making a false or fraudulent representation regarding the Debtor's financial condition, and

Refusing to obey a lawful order of the court

Title 11, Section 727 of the United States Code also provides for denial of discharge if any of the above acts are committed. There are many unfortunate stories involving criminal prosecution and denial of discharge of persons found to have knowingly concealed assets in their bankruptcy – assets that in many cases would actually have been protected had they been properly disclosed. Had those folks read this article before filing their bankruptcy cases, things might have turned out differently for them.

It is important to note that truthiness does not have to involve intentionally lying and concealing information in order to cause serious problems in a bankruptcy case. Here is a common bankruptcy scenario involving “truthiness", which does not involve an actual intent to lie or conceal:

Bankruptcy Attorney: Has anyone died recently that might leave you money or property – an inheritance?

Bill P: Well, my dad died two months ago, but he doesn't own anything. Besides, I hear probate is going to take months. I don't think I'll get anything.

Bankruptcy Attorney: Did he own a house?

Bill P: No, he was in a nursing home.

Bankruptcy Attorney: Do you know if he had a life insurance policy?

Bill P: Yeah, he did, me and my two brothers are named as beneficiaries, but we're not going to get it for a long time, my brother said, so I don't see this affecting my bankruptcy. It's not something I have now.

Bankruptcy Attorney: If we file your bankruptcy now, we have to disclose the expected inheritance as an asset. How much will you be getting, do you know?

Bill P: Only about $30,000.

Bankruptcy Attorney: That could be a problem for your Chapter 7 – your car is worth $17,000, and we won't have enough exemptions to protect the inheritance. Let's discuss some options.

Bill P: Can't we just not mention it? It's really not mine now anyway – my brother said it will be at least 9 months before everything is divided up. So how is that an asset that I have now?

Bankruptcy Attorney: It's what we call an “interest in a decedent's estate" - money or property you expect to receive in the future as a result of someone having already passed away. It's an asset that must be disclosed in your bankruptcy if you file now.

Just imagine what would have happened if Bill had not consulted with an attorney and filed bankruptcy on his own, without first obtaining a lawyer's advice. He would have omitted the inheritance, believing that because he wouldn't actually receive the inheritance for several months, it was not an asset he had to disclose now in his bankruptcy. At his bankruptcy hearing, the Trustee would ask the same questions posed by his attorney. Bill would be under oath; if he did not answer the questions truthfully, he would be committing perjury. Trustees have very broad investigative powers. If the Trustee discovers the expected inheritance, the likely consequence for Bill would be: 1) he would be required to amend his bankruptcy to include the asset, and if he refuses, his bankruptcy discharge would likely be denied, 2) he would then lose any exemption or portion of exemption he might otherwise have to protect the inheritance, and 3) the inheritance would be liquidated by the trustee to pay his creditors. Fortunately, Bill has an attorney who will advise him of the consequences in failing to disclose the asset in his bankruptcy, as well as the alternatives to filing his bankruptcy now

The previous scenario is a pretty obvious example. Truthiness in bankruptcy can take many forms, however, other than as described above. Before a person files bankruptcy, it is crucial that they conduct a diligent investigation of their affairs. The Debtor who has filed a Bankruptcy Petition will be deemed to have full knowledge and understanding of the information contained therein, and will be held responsible for the truthfulness of its contents. The information contained in a bankruptcy must be based on hard facts and exact numbers, to the extent possible. Estimating numbers without confirming their accuracy is another form of truthiness in bankruptcy which can lead to big problems.

For example, the bankruptcy paperwork to be filed with the court requires all Debtors to accurately state their income from all sources. Providing an incorrect estimate of one's income can result in a person filing the wrong chapter of bankruptcy, and ultimately dismissal of the case. Believing one does not have to list “under the table" income because “there is no record of it" is yet another example of truthiness in bankruptcy that can come back to haunt the Debtor.

Here is another example. The bankruptcy paperwork to be filed with the court requires Debtors to list all of their assets, along with the corresponding fair market values. Before filing bankruptcy, a person should carefully inventory their possessions and determine the appropriate fair market values for their assets. Providing an incorrect estimate of the value of one's assets can result in the loss of those assets. Most Bankruptcy Trustees are very knowledgeable about property values and are understandably suspicious when they see a figure that looks comparatively low. Trustees regularly conduct their own appraisals of assets to confirm the accuracy of the figures provided by Debtors and to determine whether the asset's value exceeds the bankruptcy exemptions that would be used to protect it. If the asset turns out to have unprotected value, it will likely be sold by the Trustee with the proceeds going to pay the Debtor's creditors. Believing an asset doesn't have to be disclosed because “it was a gift" or “it's ugly – who would want it" are still more examples of truthiness in bankruptcy that will, at the very least, draw the ire of the Trustee, and at worst, can result in the loss of the assets, denial of discharge, or even criminal prosecution.

Fortunately, the pitfalls of truthiness in bankruptcy are absolutely avoidable simply by fully understanding one's situation. A good bankruptcy attorney will conduct a probing interview with their clients, asking questions to make sure the client actually understands the nature and extent of their financial affairs, and has a realistic impression of their situation. The Attorney will also request certain documents to confirm much of what the Debtor has told them, such as copies of deeds, tax returns, credit reports, printouts from Kelley Blue Book showing the value of their vehicle, etc. The Debtor must be honest with their attorney and disclose all pertinent pieces of information. Without disclosure, there can be no protection. When the bankruptcy is finalized and ready to be signed, there should be no loose ends for the Trustee to hang the Debtor with. This will ensure everything goes smoothly once the case is filed, and there are no unfortunate surprises later on.

1

Collins English Dictionary - Complete & Unabridged 10th Edition 2009 © William Collins Sons & Co. Ltd. 1979, 1986 © HarperCollins Publishers 1998, 2000, 2003, 2005, 2006, 2007, 2009

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