Concealing assets in bankruptcy

We have long counseled our clients and fellow bankruptcy attorneys that concealing assets in bankruptcy is dangerous and costly. A recent (and soon to be published) opinion issued  by Chief Judge Kathryn Ferguson of the New Jersey Bankruptcy Court (In re Benjamin and Paylor, case number 14-22191) underscores this.

In 2014, Monica and Edward filed a Chapter 7 bankruptcy. Although Monica had recently sued for her personal injuries, neither Monica or her husband listed that claim (as they were required to do so) and did not disclose its existence when asked by the trustee. Relying on these false statements, the Trustee filed a final report that there were no assets to administer or possible money to pay creditors. Monica and Edward got their discharge and the case was closed. Three years later, Monica agreed to a settlement of her personal injury claim for just under $20,000.00, but again did not tell the trustee or file anything to correct her false statements. Nevertheless, the Trustee found out (more about how that happens later), and successfully moved to reopen the bankruptcy case.

Now exposed, the debtors filed an amendment to disclose the claim and to assert an exemption for the full value. The trustee objected to the exemption, and the court agreed that because the case had been closed, the right to file such an exemption was lost unless the debtors asked for permission to do so, and could show that they had a good reason (“excusable neglect”) for not having claimed it while the case was open. Under these circumstances, the court noted, the debtors are going to have a hard time proving excusable neglect.

The likely result is that Monica will not see a penny of the settlement money. The irony is that had she been honest and claimed the exemption when she should have she would have pocketed all the net proceeds.

So how did Monica get caught? The opinion does not say but most likely her personal injury attorney or defense counsel found out about the bankruptcy through a judgment search. Because  such a search is required to check for possible child support claims and because all bankruptcies show up on these searches, the bankruptcy comes to light. To avoid possible future legal problems of their own, the insurance company or the attorneys will normally follow up with the trustee.  This is actually fairly common.

The lesson is that those who think they will not get caught lying are playing a dangerous game. We expect that the last chapter of this affair for Monica may yet be written, with more bad consequences to follow.

As bankruptcy attorneys we are careful to make sure our clients understand this, and to ask the questions that need to be asked, so that precisely what happened here does not occur.