Georgia Bankruptcy Blog

We frequently see cases in which debtors omit assets from their bankruptcy schedules, only to find they are later estopped from claiming an interest in those assets.  See here, here and here for a sampling of recent cases on judicial estoppel.

However, there is another side to the coin and the penalty is much more harsh than losing the asset.  In US v. Holthaus, 2006 U.S. Dist LEXIS 45662 (July 5, 2006), the debtor pled guilty for one count of bankruptcy fraud (see 18 USC 152(3)) and the issue before the court was the appropriate sentence.   He had omitted from his schedules --

1. A $5000 tractor (secured by $5,000 loan, so there was no equity).
2. A cabin worth $14,000 with, at best, $4,000 of equity and probably closer to little or no equity.
3. Pre-petition inheritance income of $36,000, which had purportedly been spent, perhaps properly,  prior to filing for bankruptcy.
4. Gambling income of $1,400 within 2 years of filing, all of which had been purportedly spent prior to filing.

Arguably, none of these items, had they been properly disclosed, would have significantly impacted the estate.  It may have not even been worth the trustee's time to investigate any of these items.  Moreover, the Bankruptcy Court denied the debtor' discharge so ultimately there was no harm to the creditors, beyond the actual debt. 

Nevertheless, the court looked at the intended harm, which was the potential equity in the assets and total income omitted from the schedules.  That earned the debtor a federal vacation of 10-16 months, and restitution  for the trustee's time of  $8,000. 

The lesson to debtors is, obviously, disclose all of your assets and answer all questions truthfully (truth + fully).  You cannot over-disclose to your lawyer or on the schedules.  For debtors' counsel, explain the criminal and civil (bankruptcy) penalties for false schedules, and get a signed statement that it has been explained.  It can't be good marketing when a client is denied a discharge and gets indicted, especially if the client defends by claiming he/she didn't understand what is supposed to be disclosed.

I think that the last paragraph of your post ought to be taped to the computer monitor of every consumer bankruptcy lawyer. At least four or five times a year, I have a client say something like "between you and me" or "you're my lawyer so I can tell you this." These statements usually followed by the revelation of a preferential payment, hidden assets, cash sources of money or other inconvenient facts that should appear on a petition. No matter how much the fee, no one case is worth your reputation or your law license.
I think I am going to print out the Holthaus case and give it to all of my clients.