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Houston Bankruptcy Court Revokes Discharge for Failure to List Assets

Some bankruptcy clients do not take the bankruptcy disclosure process seriously. Some view it as unimportant lawyer paperwork. This attitude is a serious mistake.

Any competent bankruptcy attorney will tell all of his clients that they must disclose and itemize all assets, creditors, income, expenses and other required information. The bankruptcy schedules must be meticulously accurate and complete. All assets must be disclosed, even if the debtor believes that the omitted assets do not have any significant value.

The consequences of filing inaccurate bankruptcy schedules can be disastrous, including the possibility that a court will revoke the bankruptcy discharge issued at the conclusion of the case. A bankruptcy discharge is normally the primary benefit of filing for bankruptcy.

A second and more devastating consequence is the possibility that the debtor will be the subject of a criminal indictment for bankruptcy fraud. A conviction for bankruptcy fraud can result in the debtor serving a 5 year federal prison term.

In the course of the opinion the court recited the basic rules relating to the revocation of a bankruptcy discharge. First, a discharge can be revoked if the following facts are proven: (1) the debtor committed fraud in connection with the prosecution of the bankruptcy case; (2) the party that wants the debtor’s discharge to be revoked was not aware of the fraud until after the bankruptcy discharge was granted; and (3) a motion to revoke the discharge is filed within one year after it was granted.

Second, “fraud” for purposes of revoking a bankruptcy discharge, includes the intentional failure to disclose assets. The revocation of a discharge is an extraordinary remedy and is sparingly applied. An inadvertent omission of assets will not constitute a fraud justifying revocation of the discharge. The omission must be knowing and intentional.

In this case the Court found that the failure to disclose the assets was intentional and justified the revocation of debtor’s bankruptcy discharge. The Court found that the debtor’s testimony was unbelievable because of the following inconsistencies:

• She testified that she never signed the bankruptcy petition and never authorized her lawyer to file it. However, she expressed no surprise when she learned that the bankruptcy was filed, attended her creditor’s meeting and generally participated in the allegedly unauthorized case.

• She testified that she had never signed the bankruptcy schedules, but when confronted with the signed documents, she admitted that the signatures were identical to her own.

• She testified at the creditor’s meeting that she had reviewed and signed her bankruptcy schedules, that they were accurate and that no corrections were necessary. At the hearing she claimed that the testimony at the creditor’s meeting testimony was not accurate because she believed that her “schedules” only referred to her list of creditors and not to her list of assets.

The court found that the debtor’s failure to disclose, combined with her false testimony and use of the undisclosed assets after the petition date, demonstrated her bad faith and her fraudulent intent. The moral of this story is clear. Any debtor contemplating a bankruptcy filing should take the bankruptcy disclosures very seriously and hire an attorney that does the same thing. you should have no problems with your court case if all court filed documents are complete and accurate, and you are represented by competent legal counsel.