The importance of documentation in Bankruptcy Cases

If there’s one thing lawyers in general repeatedly see from their clients–in any field of law–it’s the lack of proof or evidence necessary to properly represent them or assist in solving their problems.

What the Bankruptcy Code Requires

In order to receive a discharge of debts in a Chapter 7 case, the debtor must have kept and maintained adequate books and records from which their financial situation can be be determined. (11 U.S.C. 727(a)(3))  This means anything that relates to or substantiates their current financial situation as well as historical data that shows how they got to this point.  It includes proof of income and expenses, and assets and debts.

Common Document Mistakes Made In Bankruptcy Cases

In bankruptcy, the common errors I see in this regard include the following:

  • Paying rent with cash (often to family or friends);
  • Not having a written rental agreement;
  • Paying childcare expenses (baby sitter) with cash (and usually not paying the required “nanny taxes”;
  • Making charitable contributions without getting receipts;
  • Selling assets without keeping records of the transactions;
  • Giving or receiving loans without a promissory note, etc.

Are you Hiding Assets From Creditors?

Clients often tell me that they are paying rent to their parents for allowing them to live there, but there is no rental agreement.   Unfortunately, this could look to the bankruptcy court and creditors as though the debtor in question is merely gifting money to relatives to keep it out of the reach of creditors which is a big “no-no” (known as a “fraudulent transfer”).

Failure to have these items can result in all kinds of problems in your bankruptcy case, from as minor as having the expenses disallowed in your budget (thereby making it look like you have more disposable income than you really do) to having your entire discharge denied for failure to keep adequate books and records from which your financial situation can be be determined.

It is very important to have and maintain records of your financial transactions.  If necessary, these can sometimes be created after the fact to properly memorialize the intent of the parties, but it’s obviously better (and more persuasive evidence) if they are done at the time the events take place.

Loans are particularly important.  Many times clients receive assistance from family members prior to filing a bankruptcy case.

Most assume they are going to repay it when they can, but since it’s family, there is nothing in writing.

Big mistake.

If it is not a loan, then the money received is income–at least as far as current monthly income is calculated for the means test.

A Court Case Denying Discharge

This requirement was revisited by the 9th Circuit Court of Appeals in In re Caneva, 550 F.3d 755 (9th Cir. 2008). In that case, the court held that a debtor filing bankruptcy would be denied his discharge because he failed to maintain or preserve adequate books and records from which the Trustee in bankruptcy (and creditors) could assess the debtor’s financial condition.

One of the grounds for denial of a discharge in a Chapter 7 case is where 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 the circumstances of the case.”

The court in Caneva opined that this is particularly true where the debtor is self-employed or operating a business, but it is required in all cases.

Keep your Receipts and Get Things In Writing

So, the rule is:  Always get things in writing and get receipts for payments you make.  It can save you lots of problems inside and outside of bankruptcy.

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