The discharge of debts you can’t pay is the goal of a bankruptcy filing. That discharge wipes out debts, making them forever unenforceable.
Yet, it isn’t a slam-dunk that your bankruptcy case ends in discharge. The Bankruptcy Code lists 12 situations in which a debtor doesn’t get a discharge. Which is why my colleague Jay Fleischman reminded those filing that bankruptcy requires scrupulous honesty.
But in my experience, more discharges are lost or challenged by inattention and faulty assumptions than by dishonesty.
Bankruptcy requires full disclosure
The basic “bankruptcy bargain” is the debtor makes full disclosure of his financial condition and in exchange gets a discharge. Depending on the complexity of your finances, making that disclosure can take some real thought.
Bankruptcy is started by filing a list of assets, debts, budgets, and financial history on the official forms. Most of that is easy. But people get into trouble, not so often by lying as by not taking those schedules seriously.
The most frequent bankruptcy mistakes
You’d be surprised at the number of bankruptcy filers reporting that they have no clothes. Yet I’ve never interviewed a naked client. They obviously have clothes, they just didn’t tell the court about them. Which causes the court to wonder what else you have that you didn’t disclose.
The client “assumed” that only things of real value need to be listed. Not so. You list everything, often by categories. But if you own things that falls into that category, list it.
Another potentially fatal mistake is assuming that property that doesn’t stand in your name when you file isn’t yours and doesn’t have to be listed. Wrong. You may have a legal interest something titled to someone else, or you may have no interest in something that does stand in your name. Whatever the facts, your interest needs to be disclosed.
Neither of these mistakes, nor many others we could list, are the result of dishonesty. They flow from either failing to think fully about each question the official forms ask or making assumptions about the law.
Bankruptcy as an investment
For the cost of a lawyer and the filing fee, there is no limit on the amount of debt you can discharge. That’s powerful. It provides a stunning return on investment.
All it requires is that you likewise invest your time and attention in upholding your end of the bankruptcy bargain by making full and good faith disclosure.
