DISORGANIZED FINANCIAL RECORDS MAY RESULT IN DENIAL

Section 727 of the Bankruptcy Code states that “(a) the court shall grant the debtor a discharge, unless-… (3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.” To illustrate, if you are operating a business which has caused you to borrow a lot of money to finance losses to allow the business to continue operating, you must keep accurate records of gross receipts, expense payments and all financial transactions related to the business. You must keep accurate business records that will allow you or the bankruptcy trustee to reconstruct all financial transactions to determine what happened to the business and why it lost money. It is preferable to have a CPA prepare your financial records so he can attest to their accuracy. Not only must debtor keep financial records, these financial records must be organized and be easily reconciled. If the records are disorganized and lead nowhere, the court may deny debtor a discharge. If you have obtained large cash out from refinancing your house, you should keep accurate records of how the money was used. If the money was used for home improvement, keep records of receipts and contracts involved in the improvement. If the money was used to pay for a medical emergency of a relative abroad, keep records of the medical expenses spent abroad, i.e. hospital and doctor bills, as well as proof of money wired to beneficiary.

In Re Sohmer, debtor a bankruptcy lawyer, filed for Chapter 11 relief in 2006 and subsequently converted to Chapter 7. During the two-year period preceding the bankruptcy, debtor established Timeless Funding Inc., a foreclosure rescue program. Over the 2 years, 25 homeowners lost ownership of their homes through their participation in the program. When debtor filed for bankruptcy, he held an ownership interest in 22 properties in addition to his home and office. Late in 2006, debtor was sued by Massachusetts. The state obtained a temporary restraining order against him that prohibited him from mortgaging his home. Despite the TRO, debtor refinanced his home and did not disclose this refinancing in his bankruptcy schedules... The state and the US Trustee asked the court to deny debtor’s discharge. The court found that they debtor knowingly and fraudulently made false oaths on his Schedules and Statement of Financial Affairs and at his Section 341-A meeting and that those false statements were material and intended to mislead the trustee and creditors. The court pointed out that the debtor did not schedule six bank accounts including one account that was opened just two days pre-petition and used to deposit funds post-petition. The court also found that the records maintained for Timeless Funding were not necessarily contemporaneous with actual receipts and disbursements and that the debtor commingled his receipts and disbursements from the Timeless Funding transactions with his law practice and personal affairs. “Although the debtor kept books and records, the books and records he kept were wholly inadequate for the trustee to understand his financial affairs without the expenditure of considerable time and effort. While the absence of records can conceal the debtor’s financial condition, a surfeit of disorganized, un-reconciled, and commingled accounts can have the same effect. As a bankruptcy attorney engaged in complex legal and financial transactions, the debtor’s accounting system-statements prepared using word processing software and an un-reconciled QUICKBOOKS software program-was woefully inadequate for the complexity and volume of the Timeless Funding transactions, preventing the trustee and his accountant from understanding the debtor’s finances within a reasonable amount of time,” the court said and denied the debtor’s discharge.

 Therefore, I suggest that you keep accurate records of your personal and business transactions. Do not throw away bank and credit card statements. You may need them to get your bankruptcy 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.