What If I Forget To Declare Property During Bankruptcy?

“During Chapter 7 bankruptcy, the debtor is charged with disclosing all of his or her income, expenses, assets and debts”

It’s natural to want to know and inquire as to what happens if you forget to declare any of your property during bankruptcy. I’ll answer this below.

During Chapter 7 bankruptcy, the debtor is charged with disclosing all of his or her income, expenses, assets and debts. The point is to allow the bankruptcy court to consider what the debtor needs to effectively reorganize personal finances.

In a Chapter 7 liquidation case, certain assets not necessary to the debtor’s welfare are taken by the bankruptcy trustee and sold to pay the creditors; the people you owe. Debtors are allowed to keep certain property that is reasonable and necessary for their personal welfare. To this end, federal and state exemption laws exist to protect a debtor’s property in bankruptcy.

Disclosing ownership of an asset doesn’t mean a Chapter 7 debtor will lose that property. Statistically, only about four percent of all Chapter 7 bankruptcy cases have an asset that is turned over to the trustee. Federal and/or state exemption laws protect most property during bankruptcy, however property exemptions are only recognized when the asset is listed and the legal exemption is properly claimed.

An asset that is concealed during bankruptcy case may not receive the full protection of the bankruptcy court or exemption laws and because of this, it is very important to identify and disclose all ownership interest in property on your bankruptcy schedules.

But what if you don’t tell the court and trustee about all of your property?

You’ll need to file an amendment

The first thing to do when you realize that you have left property off of your bankruptcy schedules is to tell your attorney; give them a call as soon as possible. The bankruptcy law is generally forgiving when an honest debtor makes an honest mistake. Your attorney will likely file an amendment to disclose the asset and use any available exemption law to protect it.

As is usually the case in life, honesty during bankruptcy is the best policy.

Rule 1009(a) allows for amendments

Rule 1009(a) of the Federal Rules of Bankruptcy Procedure allow the debtor a general right to amend the bankruptcy petition, lists, schedules, and statements. The Rule states that,

“A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed.”

Rule 1009 is liberally construed. Absent a showing of bad faith or prejudice to the creditors, a debtor is generally allowed to amend as often as he or she pleases. Most courts agree that a bankruptcy court may only deny a debtor the right to amend his or her schedules, including the schedule of exempt assets, on a showing of the debtor’s bad faith or when the amendment will prejudice creditors.

Some courts look to whether the failure to disclose an asset was an “inadvertent mistake” as evidence of a lack of bad faith. A mistake is “inadvertent” when the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.

If a proposed amendment to exempt a claim will prejudice creditors in the case, a court may deny the debtor’s motion to amend. Courts have found prejudice when:

• a debtor exhibits “inordinate delay” in amending his exemption schedules;
• if late amendment harms the litigation posture of the creditors;
• permitting the debtor’s amendment will delay the administration of the bankruptcy estate and distribution to creditors; or
• creditors have already received distributions from the estate.

Intentionally hiding property

The Bankruptcy Code allows a court to deny the debtor’s discharge based on the debtor’s misconduct during the case. Specifically, Section 727 permits the court to deny discharge when the debtor intentionally transfers, removes, destroys, mutilates, or conceals property. If the debtor is denied a discharge, that does not end the case. The trustee may still sell non-exempt property to pay creditors.

In other words, you may lose your property during bankruptcy and get stuck with all of your debts. Debts that are denied a Chapter 7 discharge are not dischargeable in any future Chapter 7 case.

You can get barred from claiming estate property

Some court have decided a bankruptcy debtor may be barred from claiming bankruptcy estate property as exempt if it is found that the debtor intentionally concealed or failed to disclose bankruptcy estate property. These courts agree that a bankruptcy exemption in property may be disallowed if the debtor has engaged in bad faith. A trustee or creditor objecting to the debtor’s claimed exemption must prove the debtor’s bad faith by a preponderance of the evidence, not a clear and convincing standard.

The Bankruptcy Code does not specifically allow the court to deny exemption based upon the debtor’s bad faith conduct, but these courts find that the power is granted generally under Section 105(a).

Note that the United States Supreme Court in Law v. Siegel, No. 12-5196 (U.S. Mar. 4, 2014), struck down a Ninth Circuit decision allowing a bankruptcy court to surcharge the trustee’s attorney fees against a debtor’s exempt property based on Section 105(a) and the debtor’s misconduct.

The long-story-short: don’t risk it and get over it. The faster you follow the proper rules and procedures, the quicker you’ll find yourself on the way to clearing your debts and facilitating a chance to take charge of your finances once again.