What happens if you fail to turnover property in bankruptcy? You could lose your discharge!

What happens if you fail to turnover property in bankruptcy? You could lose your discharge!

When a bankruptcy case is filed, the goal is to keep the debtors with as much of their property as possible.  Sometimes, though, to get the discharge, a debtor has to turnover property.  Generally, it’s because they don’t have sufficient exemptions to protect the property.  A very tricky asset can be a potential tax return.  Even though you have not received it yet, a potential tax return is a bankruptcy asset.  What happens, though, if you fail to turnover property in bankruptcy?

In this case, out of the Bankruptcy Court for the Northern District of Iowa, the debtors were a husband and wife.

FACTS

They filed for chapter 7 bankruptcy in November 2014.

Since the case was filed towards the end of the year, the trustee sent the debtors a letter advising that any tax return they would receive in 2015 may be part of the bankruptcy estate, so do not spend any of that money.

When the debtors appeared for their 341 meeting, the trustee advised the debtors again that, after they filed their 2014 tax returns, that if they were receiving a refund, they should set the money aside and let their lawyer know, who would in turn notify the trustee.  The debtors responded that they understood.

The debtors received their discharge in March 2015 and their bankruptcy case was closed.

In March 2015, the debtors provided their attorney with a copy of the 2014 tax returns, who then forwarded the same to the trustee.  After some discussion, the trustee demanded that the debtors turn over about $7,600 from their tax return.

In June 2015, the lawyer for the debtors sent the trustee a letter stating that the debtors did not have the tax refund monies.  It later turned out that this was untrue, that the debtors were saving those monies for emergency expenses, including an anticipated surgery that the husband would be having.

The debtors offered to pay the trustee $50 a week, but the trustee demanded all of the monies by August 2015.  The debtors failed to send any payments to the trustee.

Thereafter, the trustee sought a court order seeking turnover of the $7,600.00.  The court granted the motion, and ordered that the debtors turnover the $7,600.00 within 14 days.  The debtors failed to do so.

In October 2016, the trustee still having not received the tax refund monies, commenced an action in the bankruptcy court seeking revocation of the debtors’ discharge.

COURT ANALYSIS

The court acknowledged that revocation of a debtor’s discharge is an extreme and harsh remedy.

At trial, the debtors acknowledged that they understood that the tax refund monies was property of the estate that was to be turned over to the trustee.  They acknowledged that they were also aware of the court order.  Notwithstanding, they kept the monies to help with the husband’s surgery costs, and the expenses they would face while the husband was unable to work, which he was unable to work during September and October 2016.

The debtors contend that they did not intend to withhold the money, and that their actions did not rise to the level of fraud to merit a revocation of discharge.  The trustee argued that discharge should be revoked on one of two grounds: (1) the debtor knowingly and fraudulently failed to turnover property of the estate; and (2) the debtor refused to obey a court order.

REVOCATION OF DISCHARGE FOR FAILURE TO TURN OVER ESTATE PROPERTY

Concerning the trustee’s first argument, the court looks to the debtor’s actions to determine whether they knowingly and fraudulently withheld property of the estate.  In this case, while the debtors argued otherwise, the court found that the actions of the debtors were done knowingly and fraudulently.

The debtors acknowledged that they knew the tax refund monies belonged to the estate.  They acknowledged that they understood that if and when they received the monies, that they were to not spend it.  When the court order was issued, they were aware that they were supposed to turn the money over, but did not.  Rather, they kept the money and spent it on expenses.  Additionally, they lied to their own attorney and said that they did not have the tax refund monies.  Therefore, the court found that their actions were done knowingly and fraudulently.

REVOCATION OF DISCHARGE FOR FAILURE TO OBEY COURT ORDER

With respect to the second argument, the court found that it had cause to revoke the debtor’s discharge for failure to obey the court order.  The debtors were aware of the order, understood it, and failed to turn over the tax refund monies without explanation.  US Trustee v Castro, AP-15-9042-TJC (In re Castro, 14-1758-TJC) (Bankr. N. D. Iowa, March 2017).

CONCLUSION

People file for bankruptcy to obtain a “fresh start.”  Sometimes, to get that fresh start, you have to part ways with property.  In many cases, you can predict what property you may have to turnover to get the discharge.  If you move forward in bankruptcy and are faced with a demand for turnover of property, don’t dismiss or ignore it.  Further, don’t ignore a court order.  In this case, it cost the debtors their bankruptcy discharge.

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