The Consequences of Lying in a Chapter 7 Bankruptcy Case
Many Iowa residents are forced to file for Chapter 7 bankruptcy because they are faced with a large civil judgment they simply cannot pay. While a bankruptcy court can discharge such a debt, it is imperative that the debtor not try to mislead the judge, the bankruptcy trustee, or their own creditors. Bankruptcy requires you come clean about your income, assets, and debts. And if you fail to do so, there may be serious consequences.
Debtor “Takes the Fifth,” Faces Sanctions from Bankruptcy Judge
Consider this recent decision by a bankruptcy judge in northern Iowa. The debtor in this case sought Chapter 7 protection after a creditor–the debtor’s former business partner–obtained a $585,000 civil judgment against him. The judgment creditor opposed the bankruptcy by filing what is known as an “adversary proceeding.” This is essentially a special type of civil lawsuit that occurs within the confines of the bankruptcy court.
As is common in civil cases, both sides were entitled to conduct discovery. The creditor apparently spent upwards of $130,000 in legal fees during this time. The thrust of the creditor’s case was that the debtor made numerous false statements on his bankruptcy petition, which had the effect of “drastically” understating the debtor’s assets and income.
When the creditor’s lawyers questioned the debtor about these issues, the debtor invoked his constitutional right against self-incrimination. In other words, he “pleaded the Fifth.” But as the bankruptcy judge explained, this is not a criminal case, and a refusal to testify can be used against you. Here, the debtor’s silence combined with other evidence produced during discovery led the judge to conclude that the creditor was right–the debtor did lie on his bankruptcy petition.
The debtor then tried to “convert” his case from a Chapter 7 to a Chapter 13 bankruptcy. The judge said this was “entirely improper.” There is a limit on how much unsecured debt a Chapter 13 filer may have, and the debtor in this case “knew or should have known” he was over that limit. The judge said the conversion motion was therefore little more than an attempt to create an “unnecessary” delay.
Ultimately, the judge agreed with the creditor that the debtor was not entitled to a discharge. The creditor also moved for sanctions against the debtor. Basically, the creditor wanted the debtor to pay all of his legal bills in connection with the adversary proceeding. The judge declined to go that far. Instead, the court ordered the debtor to reimburse the creditor for his legal fees in connection with fighting the frivolous conversion motion and helping to “uncover” the debtor’s wrongdoing in the first place, which came to $17,500.
Speak with an Iowa Chapter 7 Bankruptcy Lawyer Today
The bankruptcy process only works when the debtor is completely honest. Trying to “game the system” will only end up hurting you in the end. That is why if you are in financial trouble and do not know what to do, you should speak with an experienced Southeast Iowa bankruptcy attorney. Contact the Noyes Law Office, P.C., today if you need immediate assistance.