HONESTY AND TRANSPARENCY OF FINANCES REQUIRED FOR BK DISCHARGE

I cannot overemphasize the need for debtors to be honest and transparent in their financial transactions when they file for bankruptcy. That is why the bankruptcy petition and schedules must be as accurate as possible when the case is filed. Even though debtors have the absolute right to amend their petitions and schedules after the case is filed, a petition that is fundamentally inaccurate affects the credibility of debtor, and could eventually cause the dismissal of the case or denial of discharge. The bankruptcy bargain is simple and straightforward. Debtor gets a discharge of all his debts. He may owe $10,000, $100,000, or $100 million. If he is honest and transparent in his bankruptcy, the court will discharge even $100 million, even $1.0 billion of debt! On the other hand, if debtor is dishonest and not transparent in his financial transaction, the court will deny his discharge and debtor will not be able to get rid of his debts, leaving him and his assets to the mercy of his merciless creditors. Worse, debtor may end up in jail for committing a bankruptcy crime, if he is dishonest in his bankruptcy.

 In Re Jalajel, debtor and his wife filed for Chapter 7 relief on February 27, 2009. He filed his schedules and statement of financial affairs one month later. Schedule B listed personal property with a total value of $75,014 of which $8,800 was jewelry and $100 was a Rolex watch. The value of the Rolex watch alone is a red flag. Everyone knows that a Rolex is worth several thousand dollars. The court found that debtor bought 28 pieces of jewelry, excluding the Rolex watch, for $110,056 from a single jewelry store about two years before he filed his bankruptcy. Was debtor thinking of setting up his own jewelry store? When the bankruptcy was filed, the couple still had half of the jewelry representing a purchase price of about $100,000. After filing bankruptcy, debtor sold jewelry including his $100 Rolex watch to a pawn shop in three separate transactions for a total of about $12,000. Right before the bankruptcy was filed, debtor sold twelve pieces of jewelry for $11,000. And, debtor testified that seven pieces of jewelry were lost. Probably his dog ate them?

The court denied the debtor’s discharge. “The debtor omitted jewelry from his schedules, undervalued the jewelry (I mean, who has ever heard of a Rolex worth $100; a Seiko, Bulova or Timex, sure; but a Rolex for $100? No way Jose) and the Rolex he scheduled and sold his Rolex watch and jewelry post-petition with the intent to defraud his creditors. It is clear that jewelry was omitted and undervalued and that the nature of the Rolex watch was concealed by not revealing that it was a Rolex and by substantially undervaluing it. The fraudulent intent is inferred from the debtor’s actual knowledge. (I didn’t know it was a Rolex, I thought it was a Timex, because all watches look the same to me and all they do is tell you what time it is – debtor testified.) He had paid almost $120,000 for the jewelry and believed it was of significant value,” the court said.

 “The bankruptcy bargain is straightforward. The debtor gets a discharge and a fresh start. In return, he must be honest, his financial condition and affairs must be transparent and he must surrender his non-exempt assets. In this case, the debtor did not live up to his part of the bargain. His schedules were false. His jewelry assets were unclear. He converted property of the estate for his own purposes. It does not matter why a debtor files false schedules or conceals assets; if he knowingly and fraudulently does so, it is the fact that he does so that is the offense…” the court said.

Once again, I stress the need for debtors to be honest and accurate in their bankruptcy petitions, schedules and statement of financial affairs. If you are a dishonest debtor, you may be denied discharge.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.