December 15, 2017

Bankruptcy Fraud: Don’t Cross that Line!

bankruptcy fraudNews reports indicate that former baseball star Lenny “Nails” Dykstra has been charged with bankruptcy fraud by a California based United States Attorney.  Dykstra filed for Chapter 7 bankruptcy in 2009, scheduling $31 million in debts and only $50,000 in assets.

In the complaint, prosecutors allege that Dykstra sold or destroyed over $400,000 worth of property.  Among the property that Dykstra allegedly sold – presumably to raise case – were sports memorabilia and furnishings from the home he lost in the bankruptcy.

Obviously most of the Chapter 7 cases filed in the Northern District of Georgia, or in most bankruptcy courts do not involve millions of dollars of debts incurred by a high profile debtor.  However, there is an important lesson that all bankruptcy filers can learn from the charges levied against Mr. Dykstra. [Read more…]

What is a Redemption of Property in Chapter 7

If you are purchasing a vehicle and you file Chapter 7, your options are (1) surrender the vehicle, (2) reaffirm the existing loan, or (3) redeem the vehicle by paying the lender fair market value.  Redemption, which is described at Section 722 of the Bankruptcy Code used to be an uncommon choice.  More recently, however, several lenders have entered the market to finance Section 722 redemptions.  In this video, I discuss how redemptions work and how to know if a Motion for Redemption under Section 722 is a good idea.

[mc src=”http://www.youtube.com/watch?v=3ebX9zlCskU” type=”youtube”]Redemption of Collateral in Chapter 7[/mc]

Will Bankruptcy Issues Affect Georgia Governor’s Race?

Nathan Deal under scrutiny for financial woesIf you have been reading your local newspapers, you may be aware that Nathan Deal, the Republican candidate for Governor of Georgia, is facing scrutiny about his personal finances and about the bankruptcy filings of his daughter and son-in-law.

According to the Atlanta Journal-Constitution, Mr. Deal personally guaranteed bank loans totaling over $2 million that was used to build and finance a sporting goods store owned by his daughter and son-in-law called Wilder Outdoors, located on Highway 365 near Gainesville.   Unfortunately for the Wilders, the sporting goods business failed, leaving about $2.5 million due.  Mr. and Mrs. Wilder filed Chapter 7 bankruptcy in 2009, discharging their obligations on the outstanding bank loans, leaving Mr. Deal exposed as the guarantor.

Mr. Deal and the Wilders were able to refinance the business loan several years ago prior to the closing of the business but now, a $2.5 million debt will come due in February, which would be about a month after he takes office if he wins. [Read more…]

Real Housewife Star Teresa Guidice Faces Allegations of Bankruptcy Fraud

United Press and about two dozen tabloid web sites and blogs are reporting that reality TV star Teresa Guidice, and her husband Joe have been sued by their Chapter 7 trustee for failing to report assets in their bankruptcy petition.  Guidice, one of the “Real Housewives of New Jersey,” apparently signed a book contract for a cookbook that will pay her $250,000 but failed to reveal that asset on her petition.  The trustee also alleges that the tax returns submitted by Teresa and her husband were fraudulent as well.

Setting aside the question of why a book publisher thinks it can make back a quarter of a million dollars on sales of  Teresa Guidice’s “Skinny Italian” cookbook, what Teresa and her husband are facing is a complaint under Section 727(a)(4) of the Bankruptcy Code, which bars a Chapter 7 discharge to a debtor who knowingly and fraudulently, in or in connection with the case—

(A) made a false oath or account;
(B) presented or used a false claim;
(C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act; or
(D) withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs;
According to the trustee, Teresa’s book contract is an asset of the estate and these funds should be available to creditors.  If the trustee is successful with his complaint, Teresa and Joe’s Chapter 7 case will be dismissed and their creditors will have free rein to initiate collection activities against them.

Can You be Sued for Non-payment of your Mortgage if You Do Not Reaffirm?

I recently received an email from a blog reader asking about his obligations to his mortgage company when he does not reaffirm:

I have read your blog and you are very through so I write you with hopes that you might answer this question for me. I file Chapter 7  in 08, and did not reaffirm my loan. I am still living in the house and did make some payments. However, i have not for the last 8 months. It is my understanding that I must sign a document to reaffirm and that continuing payment in itself is not a reaffirmation…or?  Well it gets a little more complicated.  My house is valued at $410,000 and the bank has offered me a deal that is going to be hard to refuse. They have agreed to let me do a short re-fi in the amount of 180k.  If I agree to that is that in itself a reaffirmation?

Here is my response: in most cases, when you take out a mortgage loan, you are signing two different types of agreements.  The first type is a promissory note whereby you personally agree to make the payments.  The second type of obligation creates a property lien, meaning that you, as the owner of the property, pledges that property as collateral for the loan.

When you file a Chapter 7 and receive your discharge, your personal obligations are extinguished.  However, a Chapter 7 discharge does not eliminate the mortgage company’s lien against your property.  If you “reaffirm” your mortgage, you are actually reaffirming the promissory note and your personal obligations to pay.

For years, many bankruptcy attorneys advised their clients to avoid signing reaffirmation agreements for mortgages, car loans or any other secured debt.  The reasoning – even without a personal “guarantee” lenders are protected by the property lien.  If the lender is willing to accept payments (the so-called “stay and pay” option), the now discharged debtor keeps his property, keeps making payment, but does not have personal liability on the note. [Read more…]

Examples of Bankruptcy Fraud

bankruptcy fraudLast October, I wrote a post on this blog about bankruptcy fraud, and pointed out that everything included in a bankruptcy filing is subject to scrutiny by the office of the United States Trustee, which is an arm of the United States Department of Justice.  In other words, false statements on a bankruptcy petition could land a debtor in hot water – dismissal of the bankruptcy case, fines and even prison.

Because the bankruptcy process can seem informal, it can be easy to forget that a Chapter 7 or Chapter 13 filing is made up of documents filed in a federal district court and subject to investigation by the F.B.I.

Attorney Gini Nelson, a New Mexico bankruptcy lawyer, recently published a post about bankruptcy fraud in the Bankruptcy Law Network blog.  Gini’s post includes a link to the IRS.gov site containing examples of bankruptcy fraud investigations.   I found the IRS.gov link especially interesting in that one can get a sense of the type of fraud that bankruptcy debtors have attempted and the level of fraudulent activity that generated prosecution.  Given the highly interconnected and electronic public record access that is available to bankruptcy trustees as well as government investigators I can’t believe any of these folks believed that they would not be caught.

Failure to Disclose Assets Lands Chapter 7 Debtor in Prison

Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts.  This particular debtor used Chapter 7 to discharge over $1 million in liabilities.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor’s case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a “poison pen” letter to the trustee will allegations about improper activities by a bankruptcy debtor. [Read more…]

Forgotten Lawsuit Creates Big Problems for Prior Chapter 7 Client

Earlier this month I received a call from a Chapter 7 client that I had represented several years ago.  He is attempting to refinance his house and has discovered that a judgment creditor has a lien for several thousand dollars.  The creditor was listed on the case, but neither he no I knew that there was any judgment.

I directed him to visit the county courthouse and pull the file for this case.  He did and he reports that the return of service shows that his wife was served by a sheriff’s deputy.  His wife has no recollection of being served.  We did list the creditor on the bankruptcy petition but because we did not know that there was a judgment, we did not file a motion to avoid the judgment lien.  What can he do?

There are a number of lessons you can learn from this man’s experience.  First, you should always obtain copies of credit reports from all 3 credit bureaus prior to filing bankruptcy.   In Georgia, you can get a free credit report from each of the 3 main credit bureaus twice a year.  Online, you can go to annualcreditreport.com and download your reports.  Because credit reports obviously contain sensitive information the annualcreditreport.com system will ask several questions to identify yourself.  These are usually multiple choice questions – for example, the system may say “your credit report shows that you previously lived on one of the following streets: (a) Oak Street (b) Thompson Street (c) Ivers Road (d) none of the above.

If you are unable to answer these questions, the system will instruct you to mail away for your credit reports – here is a link to a page on my website with the credit report request letters.

Credit reports are helpful because they will usually show pending lawsuits as well as the names, address, account numbers and debt amounts for most of your creditors.  Obviously I can’t require all bankruptcy clients to bring me credit reports but it sure helps avoid “forgotten” creditors or judgments. [Read more…]

Debts Arising from Impaired Driving are Not Dischargeable

Recently I met with a client who was looking into filing bankruptcy because of credit card and medical debt.  Among his creditors, however, was an individual, an insurance company and fines due a local county.  When I asked about this, he explained that about a year ago, he was involved in an auto accident that was his fault.  He further explained that the individual sued him and that damages awarded were more than his insurance coverage, and that he also had fines because the accident occurred when he was under the influence.

He was unhappy to learn that Section 523(a)(9) of the Bankruptcy Code specifically excepts from discharge debts arising from the “death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”

I read this Code section to mean that my client cannot discharge:

  • any damage award due to the accident victim
  • restitution ordered by the local county court
  • fines imposed by the local county court

What about property damage arising from this drunk driving accident.  I read the Code section to limit non-dischargeability to personal injury so I do not think that property damages would be excepted here.

Washington D.C. bankruptcy lawyer Morgan Fisher wrote a post about DUI damages and bankruptcy dischargeability last year.  He notes that an insurance company seeking subrogation damages (recovery of car repair payments from the negligent driver by an insurance company) could argue against dischargeability under other provisions of Section 523.   I believe that Morgan is referring to Bankruptcy Code Section 523(a)(6) which excepts from discharge debts arising from the “willful and malicious injury by the debtor to another entity or to the property of another entity.” [Read more…]

FBI Warns Against Bankruptcy Fraud

My Bankruptcy Law Network colleague Rachel Foley from Kansas City has written a useful article on the Bankruptcy Law Network blog that brings to light a problem that many debtors (and perhaps many debtors’ attorneys) don’t think about too much – bankruptcy fraud.

FraudIn my practice I observe that when they come to meet with me many prospective bankruptcy filers are angry – angry at harassing creditors, angry at their employer for cutting hours or jobs, and angry at some of the rules that apply when one files bankruptcy.   Despite what some in Congress may say, no one wants to file bankruptcy and I have met many very nice, reasonable people who feel that they played by the rules and now they are going to have to start all over at age 40, 50 or older.

The net result of this anger sometimes is a sense of “us against them.”  Sometimes this manifests itself in an attitude that the debtor will follow the rules mostly but who is going to harm if they don’t reveal a cash payment to a relative or the transfer of an old car to a brother.

As Rachel points out in her fine post, this sort of an attitude can really get you in trouble.

When you sign your name to a bankruptcy petition, you are declaring under oath that the information contained therein is truthful and accurate.  If you leave something out intentionally you may not get caught, but, then again you may.  The  U.S. Trustee and the U.S. Attorney have been known to prosecute debtors to set precedent. [Read more…]

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