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Depressed About Your Financial Situation? Don’t Clean House!
By
Jay Fleischman
People who are
considering personal bankruptcy are often
depressed about their financial problems.
Many come into their lawyer’s office with
shopping bags filled with unopened
collection letters, bills, and even court
summonses. This frustrates their attorneys
because it necessarily means that more time
and effort will need to go into properly
preparing the case.
The alternative for many consumers is to
simply throw out their bills each month. I
call it the “head in the sand,” way of
living and, though understandable, it could
torpedo a bankruptcy filing.
Witness the recent case of In re Keefe, 2007
WL 4544247 (Bkrtcy.D.Mass. 2007). John J.
Keefe III is a carpenter and homebuilding
contractor who owned and operated his
business for a number of years. During that
time, he kept all of his financial and
business records in a plastic bin. In the
spring of 2004, Keefe’s business began
experiencing cash flow problems that arose
from nonpayment by a client who owed a
substantial sum, from underbidding on other
projects, and from his inability to serve as
foreman on the many jobs that the company
was handling at once. Keefe’s company was
unable to complete certain of its projects
and, in essence, had to walk away from them.
In one instance, it abandoned a project on
which it had received a $100,000 advance for
work that was never completed.
In August of 2004, Keefe consulted a
bankruptcy attorney about his problems. By
the winter of 2004-2005, Keefe had become
seriously depressed about his financial
troubles. His clients had begun to harass
him–some had hired a sheriff to serve IRS
Forms 1099 on him on Christmas eve in 2004.
He was physically threatened on more than
one occasion. Some clients circulated a
slanderous letter about him to suppliers,
subcontractors, and inspectors with whom he
regularly did business. The mere sight of
the plastic bin containing the business’s
financial records would make him ill.
Sometime between December 2004 and February
2005, he relieved himself of this immediate
problem by driving the bin to, and
depositing it in, a dumpster belonging to a
roofing contractor friend. He thus
essentially destroyed the records contained
in the bin.
When he finally filed for Chapter 7
bankruptcy, the trustee asked the court to
deny the discharge based on his destruction
of financial records.
Section 727(a)(3) of the US Bankruptcy Code
states that the court shall grant the debtor
a discharge, unless “the debtor has
concealed, destroyed, mutilated, falsified,
or failed to keep or preserve any recorded
information, including books, documents,
records, and papers, from which the debtor’s
financial condition or business transactions
might be ascertained, unless such act or
failure to act was justified under all of
the circumstances of the case.”
The initial burden is on the party objecting
to discharge to prove two things: (i) that
the debtor “concealed, destroyed, mutilated,
falsified, or failed to keep or preserve any
recorded information”; and (ii) that the
recorded information was information “from
which the debtor’s financial condition or
business transactions might be ascertained.”
The plaintiff need not establish specific
intent of any kind. If the party objecting
to discharge proves these two requirements,
the burden then shifts to the debtor to
prove that “such act or failure to act was
justified under all of the circumstances of
the case.” Campana v. Pilavis (In re Pilavis),
244 B.R. 173, 176 (BAP 1st Cir.2000) (debtor
must come forward with justification).
The bankruptcy court looked to the fact that
the records were of the debtor’s
corporation, and that a number of the debts
arose from that corporation’s obligations.
Many records could not be recreated, and
others only at a tremendous investment of
time and effort. Keefe, in response, could
offer no justification for his destruction
of records save the fact that he was
depressed over his financial situation. The
court noted:
The debtor has failed to establish that the
destruction of the records was justified.
His intent in destroying the records was
benign, but the records were destroyed
nonetheless, and their destruction has
greatly hindered the trustee in ascertaining
the debtor’s financial condition and
financial transactions. An act is justified
if it is right or appropriate in the
circumstances. There is no sense in which
the destruction of the project records can
be viewed as right, good, or appropriate.
Keefe himself testified that he fully
expected to see a number of law suits
arising from the projects that KRK had
abandoned. As he was well aware, there
remained unresolved legal issues arising
from these projects, issues to which the
discarded records would be relevant. The
necessity of the records makes their
destruction unjustified.
So if you’re having financial problems,
don’t take the opportunity to do any spring
cleaning - your bankruptcy case may depend
upon it.
Conclusion
Are you one
of the many that suffer from insurmountable
debt and wonder if bankruptcy is an option?
Give us a call at (203) 924-6700 or
contact us.
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