What Happens If You Make A Mistake In Bankruptcy Court?
By: Ty S. Mahaffey, Esq.
Published: July 22, 2017
Filing for bankruptcy can be complicated, so it’s easy to make a mistake — but some mistakes can be costlier than others.
When you first file for bankruptcy, you have to file “schedules,” which are very detailed lists of all your income, expenses, assets and debts. It’s easy to make a mistake and forget something important or put the wrong dollar amount down. Plus, people sometimes give into the temptation to try to hide an asset, thinking that it’s either so small (like a Rolex watch) or so far-away (like a hunting cabin up in the mountains) that the bankruptcytrustee will never find out.
If a bankruptcy trustee does notice an omission or finds out about an error on the schedules, there are several things that can happen:
You may be allowed to file an amendment. This could happen if the mistake really is small and the trustee is certain that you made a genuine mistake without any intention to defraud the court.
The bankruptcy trustee could call for Rule 2004 examination. This part of the federal law gives the trustee the power to compel almost anyone to testify in court on the issue. That can put family and friends in difficult positions if you recruited them to help you hide a little money or a few assets before you filed bankruptcy. Anyone who refuses to testify could face a contempt charge and end up in jail.
The trustee can file a motion in order to clawback any assets or items that you transferred to someone else in violation of the rules. For example, say that you owed your father-in-law $5,000 that you wanted to pay back before you filed bankruptcy. Unfortunately for you both, that’s considered preferential treatment and a type of fraud. The trustee can demand that money back so that it can be divided among your creditors fairly.
Your bankruptcy petition can be denied if the trustee thinks that you are trying to abuse the system — which will put you right back at the mercy of your creditors.
You can be prosecuted, which can cost you a $5,000 fine and up to five years in jail for each count of bankruptcy fraud.