MISREPRESENTATION OF DEBTOR’S TRUE INCOME LEADS TO DENIAL OF BANKRUPTCY DISCHARGE

The new bankruptcy law requires debtors to calculate their gross and net incomes using the means test form B22. Differences in the calculation of income can result from many factors. A debtor intermingling business and personal expenses must be precise in the classification of expenses because a personal expense paid by the business actually results in additional income to debtor from the business if the claimed business expense in truth is a personal expense. For instance, a Chapter 7 debtor operates a restaurant. He is paid a salary of $3,000 by the restaurant. The restaurant pays debtor’s house mortgage of $1,700 expenses masked as part of business rent. Debtor perpetrates a fraud on the court because he only shows his salary of $3,000 in schedule I but does not show the $1700 house mortgage as additional income because it is shown as part of business rent in schedule J. This is pretty sneaky and may not be noticed by the trustee. But if the scheme to hide debtor’s true income is discovered by any interested party, that party can file a motion to deny discharge pursuant to Section 727(a)(4) which deals with the concealment of debtor assets as ground for discharge denial.

In Re Bub, the court found that the debtor understated his monthly income by $1,800 by falsely representing that he used his personal credit card solely for business expenses, when in fact this credit card was used for business and personal expenses. “Neither the total amount of income listed, nor the individual expenditures themselves, bear any relationship to the debtor’s own financial records. Furthermore, the debtor’s explanation that he and his solely owned business are on and the same, so that he had the right to run his personal expenses through the bank account for the business, does not absolve the debtor in this case. Regardless of whether he used his solely owned business as his personal piggy bank, it is the debtor’s failure to include as income all of the funds he took from this business for his own personal benefit, the fact that the debtor’s listed income and expenses are not supported by the documentary evidence, along with his misrepresentation in the petition that the debtor’s business had no assets, that warrant denial of the debtor’s discharge,” the court said.

In addition to the foregoing monkey business, debtor transferred three expensive cars from his name to his son’s name. Son is graduating from kindergarten next month. The debtor also transferred his one-third interest in real property to an LLC he owned. The debtor admitted that after he transferred the three cars to his son, he pledged the cars as collateral for a debt owed by another of his wholly owned businesses. However, just before he filed for bankruptcy protection, debtor transferred the cars back into his name and listed them as assets in his bankruptcy estate. The creditor who filed the motion asking the court to deny discharge asserted that the debtor’s schedules were false because the debtor falsely listed an ownership interest in the cars even though the transfer of ownership from his minor son was not completed prepetition. The creditor also asserted that the debtor under-valued the cars, and falsely claimed one as exempt.

Creditor focused its attack on the prepetition asset transfers made by debtor, and as an additional argument mentioned that debtor understated his income and overstated his expenses in an effort to his true financial condition. The court found that a significant number of the charges on the card were for personal expenses. By treating all of the charges as business expenses, the debtor understated the income he received from the business. The bankruptcy court denied the debtor’s discharge pursuant to Section 727(a)(4).

The importance of being truthful and accurate in debtor’s bankruptcy schedules cannot be overemphasized. The fact is that truth can be stranger than fiction. For instance, client spends nearly $2,000 monthly for hotel bills and $1,800 for food expense. Although these expense amounts appear absurd at first glance, they are actually true. Client is a truck driver who is always on the road. His wife travels with him so they have to stay overnight in a lot of hotels.

Jesus looked at them and said to them, “With men this is impossible, but with God all things are possible.” Mathew 19:26.

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 five 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, Mailstop 58, Bldg A-1 Suite 1125, Alhambra, CA 91803.