Depressed About Your Financial Situation? Don’t Clean House!

04 Jan Depressed About Your Financial Situation? Don’t Clean House!

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.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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