The Consequences of Lying During Bankruptcy


Posted by Mark Martella on Wed, Dec 19, 2012 @ 3:15 PM

The entire bankruptcy process works in great part on the presumption that the person filing for bankruptcy, the Debtor, will be truthful. To help promote the truthfulness, every person signing a bankruptcy petition signs it under penalties of perjury. Also, at the creditors’ meeting, a person is put under oath to tell the truth, the whole truth and nothing but the truth. Even as a little nudge or reminder, in the creditors’ meeting room, there is a big sign that the FBI investigates allegations of fraud. Finally, every attorney who files a Petition also signs a declaration that he has done his due diligence and believes that everything in the Petition is truthful. Despite these warnings, human nature being what it is, individuals tend to “push the envelope” as they say with the truth at times.

Since, as I stated above, a large portion of the bankruptcy process is based upon good faith honesty, in order to emphasize the repercussions of not being honest, the trustees look for famous people who mess up. Two very famous people in the entertainment and sports industry recently have been subjected to the full power of the United States Attorney’s office for failure to be truthful. Once such case is Toni Braxton who, prior to filing for bankruptcy, wired more than $50,000 to her estranged husband. Pursuant to the Bankruptcy Code, a debtor in bankruptcy must disclose all transfers made to insiders, which include family members, made within one year of filing for bankruptcy. In the Braxton case, the trustee is now pursuing her estranged husband for over $53,000 to re-distribute to her creditors.

Read: What Happens to me When my Friend Files Bankruptcy?

While I have never represented the likes of Toni Braxton in a bankruptcy, the common situation I see for my clients is that they may have borrowed money from a parent or a friend to make a mortgage payment or a car payment and then, prior to filing for bankruptcy, decided to pay them back. Unfortunately, that is an insider transaction and, whether it is your mom or dad, they are still an unsecured creditor and can be treated no differently than Visa or MasterCard. Therefore, if you want to avoid a relative whom you paid back from being chased by the trustee, and yes I have had that happen, you would need to wait at least one year from the date of that payment to file for bankruptcy.

Another recent case is former major leaguer and New York Met and Philadelphia Philly, Lenny Dykstra. Mr. Dykstra was charged with bankruptcy fraud for removing, destroying and selling property that was part of the bankruptcy estate without the permission of the bankruptcy trustee totaling more than $400,000 worth of property. Some of these items included memorabilia and a $50,000 custom sink. Part of his bankruptcy was caused by his purchase of Wayne Gretzky’s $14,000,000 estate in 2007 just prior to the real estate collapse.

As a result of the charges, the 49 year-old Dykstra plead guilty to 3 felony counts of bankruptcy fraud, concealment of assets and money laundering and faces a maximum sentence of 20 years. Again, being less than truthful on a bankruptcy petition has severe consequences. The truth is a crucial element in becoming debt free.


Contact a Professional Bankruptcy Attorney

If you have a situation as we described in this article and have questions or concerns, please do not hesitate to contact us to answer your bankruptcy law questions.

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