December 15, 2019

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.

When you list assets on your bankruptcy petition, you are swearing that this list is accurate under penalty of perjury.  If your trustee discovers that items have been omitted, or worse, that they have been secretly sold, the trustee will refer the case to the U.S. Attorney for prosecution.

Sometimes, I overhear conversations in bankruptcy court in which a debtor expresses frustration with the bankruptcy process or anger at an ex-wife, a former business partner or even a former employer.  I also hear conversations expressing frustration with the rather stingy dollar limits set out in the Georgia exemption statute.   I sense that some bankruptcy filers believe that the circumstances that led to their having to file were unfair and out of their control and as such leaving out inherited jewelry that “no one will ever know about” or selling a few items for cash can be rationalized.

While it is probably true that Chapter 7 trustees generally do not have the resources to thoroughly investigate every Chapter 7 debtor, I caution any bankruptcy filer not to take the risk.

First and foremost, an intentional failure to disclose assets is illegal and constitutes a crime under federal law.  No asset is worth your freedom or personal integrity.

Second, you have no way of knowing if the United States trustee will select your case for a random review which can also mean much more intrusive scrutiny.

Third, it is possible that a third party – often an ex-wife or ex-business partner – might anonymously write the U.S. Trustee to report intentional errors on your petition.

Fourth, you might fall victim to “Murphy’s law” – your trustee or someone from his office might see you walk into a pawn shop or might see your auction on eBay.   Believe it or not, these types of coincidences do happen.

Often, issues associated with assets that you cannot protect can be resolved if you do not have to file right away.   While the bankruptcy laws can be unforgiving, they will not punish you if you sell assets to raise money for food, shelter and clothing, as long as those sales are disclosed when applicable.  This is why I advise anyone who is even remotely considering bankruptcy to speak with a bankruptcy lawyer at the earliest possible date.  In my office, I regularly maintain files in “pre-bankruptcy” status for four, six, eight months or longer.  Often the delay arises from my client’s need to gain lawful benefit from assets that would be seized if the case was filed early.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

Comments

  1. Interesting take on what looks like a very sad turn of events. I wrote a post about the charges as well, and also cautioned debtors not to get cute with assets when filing bankruptcy. Absolutely everything must be disclosed. I think one of the biggest misconceptions out there about personal bankruptcy is that it’s all about debts. Most don’t know that filing bankruptcy is really about assets.

    One additional and equally important item: I commend you for using the word allegedly in this blog. Lenny Dykstra has been charged with bankruptcy fraud, however, he is innocent until proven guilty. He has not pled guilty and the U.S. Attorney has not yet proven its case. Far too often, we try these types of cases in the court of public opinion before the defendant has had his day in court. Lenny Dykstra is accused of selling sports memorabilia and a very expensive sink, these allegedly fraudulent actions are a far cry from some of the bolder asset transfers attempted in larger bankruptcy fraud cases. If the prosecutor’s allegations are true, we have text book bankruptcy fraud. If they are not, we have a text book case of a prosecutor looking to make a name for their office.

  2. K.A. Foreman says

    This is so important to share because so many feel as if bankruptcy is the answer to their problems. It is a viable option but it must be done right with a professional who knows how to address all of your options and not just push you to bankruptcy. Great post!

  3. Auto Loan After Bankruptcy says

    Don’t you just hate it when you rank up 3,000,000 in debt? Oh wait, only people with tons of cash do that. Thank you Lenny Dykstra for passing those bills on to the rest of us. I’m sure that I needed some extra fees from those debtors when I pay my credit card bills or mortgage.

  4. I was just wondering if there is a reason to choose an attorney vs. a paralegal to file a bankruptcy. Paralegal services seem to be cheaper but should I spend the money to hire a lawyer anyway?

  5. James – good question. While I understand that anyone contemplating bankruptcy is interested in saving money, I would respectfully argue that you would be making a mistake to choose a paralegal service over a licensed attorney. First and foremost, Georgia state law prohibits non-attorneys from offering legal advice. In fact, a non-lawyer would be committing a crime if he did offer legal advice (just as it is a crime for a non-physician to prescribe medicine or perform an operation). This is not to say that every lawyer with a license is qualified to represent you in a bankruptcy but at least you can be certain that a licensed attorney passed the bar exam and has met state law qualifications to practice law. There is no state law licensing for paralegals and if a mistake is made you have no recourse. The Bankruptcy Code does allow “petition preparers” to assist filers in preparing paperwork but the way the Code is written, a petition preparer can serve as nothing more than a typing service. This means that you, as the filer, needs to be confident that you understand the pros and cons of Chapter 7 vs. Chapter 13, the Georgia exemption rules, and the implications of what happens if your case does not work. If you want confirmation of this, take a visit to the 3rd floor of the Russell Federal Building where there is a bulletin board that contains copies of standing orders from judges barring paralegal service after paralegal service from accepting any more bankruptcy work. Finally I can tell you from my own observations that cases filed by non-lawyers are rarely done correctly. Several times a year I get a call from a panicked debtor who paid several hundred or even several thousand dollars to a paralegal service to stop a foreclosure or stop a wage garnishment. Inevitably the paralegal filed a “2 page” emergency filing and now is no-where to be found. The debtor just came back from a very unpleasant meeting of creditors presided over by an unhappy trustee who just told him that he will lose everything if he doesn’t get his paperwork in order. So, while I do not disagree that certain legal documents can be prepared by non-attorneys, a 50 page Chapter 7 or Chapter 13 petition is just not one where you want to risk your assets and your future with a non-lawyer.

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