Debtor Denied Bankruptcy Discharge For Inadequate Financial Records
A cautionary tale of a real estate investor who thought he could just say "I lost everything" without having the documentation to back up his claims.
"Individual debtors seeking a discharge of their debts must provide some coherent explanation of profit and loss, together with an explanation of the disposition of assets. It will most probably not suffice to complain that they blindly and willingly took the bad advice of a third party. Even the most unsophisticated individual debtors must be able to adequately account for the financial straits in which they find themselves, and they should go to all reasonable lengths to maintain adequate records or be prepared to justifiably explain their failure to do so."
Proper documentation in a presentable format is absolutely essential for companies in financial distress, but bankruptcy court is not the only reason, or even the most important.
A bankruptcy debtor gets almost all of the benefit of the doubt over creditors in bankruptcy court. Preventing discharge is difficult for creditors, but there are two exceptions. The two exceptions are:
Where a debtor unjustifiably fails to keep or preserve sufficient records from which his or her financial condition or business transactions might be ascertained
Where a debtor fails to satisfactorily explain his or her loss or deficiency of assets.
The Simmons court acknowledged that while the first exception "does not require flawless recordkeeping," debtors must still produce sufficient records to allow their financial picture to be ascertained. Moreover, the court noted, while the second exception allows for a debtor to explain the ultimate disposition of assets, the explanation must be corroborated by sufficient evidence.
If a client can demonstrate to creditors the likely outcome in bankruptcy, with documentation to back up your claim, perhaps the debtor can avoid bankruptcy and reach a favorable settlement. Although of course not always. Not even usually.
Proper records can also avoid litigation. Usually.
And saving all paper and electronic files can also come in handy to make creditors comply with their own agreements. Almost always.
This short article is heavy on the legalese but worth reading. Contact Us if you are a business struggling with creditors and your own record keeping isn't satisfactory, or if you have any additional questions or comments.
