The Hidden Dragster & Why You Never Lie in Bankruptcy
I often have clients ask the same question. I tell the client “sure, you can give the house, car or whatever to your friend/relative for free or $1. The bankruptcy Trustee will be glad to take it away from them and sell to pay your creditors.” Often the asset they are trying to protect can be protected if they are in their own hands but cannot be protected after the transfer.
Example of a Lie in Bankruptcy
I had husband and wife clients many years ago that decided to not tell me about or list a dragster they owned as an asset in their bankruptcy. After all, he wanted to keep it and since it was not registered with the Department of Motor Vehicles they though no one would know about it.
A credit card creditor filed a “non-dischargeability” fraud action. The credit card company was claiming they used the card and racked up bills to buy things when they knew they were trying to file bankruptcy and that they were not going to pay the bill.
At trial in front of the Bankruptcy Judge, the creditor asked about various charges. One that both Judge Klein and I caught the Attorney asking about services that included as my client said “repairs on the engine on my dragster.”
I looked up at Judge Klein to see him flipping pages in the court file. (Yes, there really was a time where the files were on real paper). I am also looking for this undisclosed asset.
Judge Klein stopped the credit card attorney and then asked my client “Mr. (client name), did you say that that charge was to repair your dragster?” My client said “yes.” The Bankruptcy Judge told him “I looked at your list of assets on your schedules and do not find any dragster listed as an asset. I also do not see a transfer of a dragster on the Statement of Affairs. Which of these is the truth and which was a lie?” Client sputters “Ah…well…uh…” Judge Klein “Do you have a dragster?” Client “uh…yes” The Bankruptcy Judge asks him “where is it now?” My client answered “under a tarp in my garage.” And the scary question by Judge was “Did you tell your attorney about this dragster?” My client “uh…No” At that time I am glad I had his written questionnaire that would have proved he did not tell me.
Consequence of a Lie in Bankruptcy
The bankruptcy Judge granted the credit card attorney their request for an order denying discharge of their credit card debt. Then the Bankruptcy Judge also immediately made an order that my clients were denied a discharge of all their $90,000 in debts.
As they left the courtroom, the wife was hitting the husband over the head with her purse yelling at him “I told you that you should tell Mr. Fraley about the dragster.” I did not have any sympathy for her as she signed the documents knowing they were not true.
The ultimate irony was the fact that if they had told me about the dragster, I would have been able to protect it using the California “Wild Card” exemption system.
They were fortunate. The Judge could have turned it over to the U.S. Attorney’s office for criminal prosecution and they both could have ended up in prison for lying under oath on their papers and at the “creditor’s meeting” with the bankruptcy trustee.
The bottom line: NEVER lie to your attorney or the bankruptcy court about what you own or have any rights in. Your bankruptcy attorney cannot protect what you do not tell him about. Again, NEVER LIE IN BANKRUPTCY!