What happens to an individual debtor who files a Chapter 7 bankruptcy (petition to discharge unsecured debts and retain possession of exempt assets) and fails to disclose assets to the bankruptcy court?
Disadvantages to Chapter 7
1. Dealings with family members. First, if you have repaid family members over the past year (and in certain circumstances over the last three years) over certain dollar amounts, the Chapter 7 trustee will initiate legal proceedings against the family member to reclaim the funds received by the family member over the last year. This is called a preference since you have chosen to repay a family member instead of your other creditors. In fairness to the other creditors, the trustee will reclaim the preferential payment and disburse it pro-rata amongst all creditors during your Chapter 7 case. In addition to payments to family members, any transfer of assets to a family member in the three years prior to your Chapter 7 bankruptcy filing must be disclosed and discussed with our attorney before you file your case. If an asset is transferred to a family member, the Chapter 7 trustee will likely initiate a lawsuit against the family member in order to set aside or rescind the transfer
2. Recent credit activity. If you have made charges in the last 60-90 days prior to your Chapter 7 filing, such charges may be deemed fraudulent in your Chapter 7 case. There is a presumption of fraud for any and all charges made immediately prior to your Chapter 7 filing date. If you have made charges prior to filing your Chapter 7 case and the creditor files a lawsuit against you for fraud, you may be forced to repay these sums as well as interest and attorney’s fees incurred by the creditor to sue you.
Because Chapter 7 is a liquidation bankruptcy, all non-exempt assets will be sold by the Chapter 7 trustee and the proceeds distributed to your creditors. If you fail to disclose an asset in your Chapter 7 case, you will likely lose the asset even if you could have claimed an exemption to protect the asset. Assets that people sometimes fail to disclose in Chapter 7 are automobile accident claims, employment/disability claims, inheritances, interests in trusts, and money owed pursuant to a promissory note or other debt. Chapter 7 bankruptcy trustees are experienced in locating assets and have access to databases that can track property ownership throughout the United States. I liken a Chapter 7 trustee to a forensic accountant in terms of their ability to find undisclosed assets.