‘White Lies’ Can’t Prevent Debtor’s Bankruptcy Discharge

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Diane Davis

A debtor who failed to disclose a prior lawsuit settlement and ownership of a clothing business in her Chapter 7 case can still get her debts wiped out, the U.S. Bankruptcy Court for the Middle District of Alabama held ( Jacobs v. Carroll (In re Carroll) , 2017 BL 285852, Bankr. M.D. Ala., 17-10004-DHW, 8/15/17 ).

Ina C. Carroll’s misstatements and omissions in her bankruptcy filing weren’t done with fraudulent intent, Judge Dwight H. Williams, Jr. wrote Aug. 15.

The court found that Carroll’s untruths or “white lies” resulted in little, if any, harm to her bankruptcy estate. There was little adverse effect on the trustee’s administration of the bankruptcy estate, the court said.

Bankruptcy Code Section 727(a)(4) grants a debtor a discharge unless they knowingly and fraudulently, in or in connection with the case, made a false oath or account.

Exceptions to discharge are construed liberally in favor of the debtor, the court said.

When Carroll filed Chapter 7, she failed to disclose on her bankruptcy schedules that in the prior year she received $7,500 from a lawsuit settlement and made four transfers. She paid $1,500 to her daughter, $500 to her father, $1,000 to her grandson, and $750 to church as her tithe.

Carroll also operated a small clothing business the year before filing and had gross sales of $1,300.

Later, she told the trustee at the meeting of creditors about the settlement and clothing store, and filed amended schedules to reflect this information.

Her “white lies” resulted in little, if any, harm to the bankruptcy estate because the business had been nonoperational for three months prior to bankruptcy and there were no remaining assets, the court said.

In addition, her “meager settlement” proceeds were completely disbursed as of the time of bankruptcy and had no effect on the estate, the court said. Even the trustee found these amounts so small that he hadn’t filed any actions to avoid these transfers, the court said.

There was also a lack of fraudulent intent regarding the omissions in the bankruptcy schedules, the court said.

The Valenzuela Law Firm, LLC, Ozark, Ala., represented Carroll; Trustee William C. Carn III, Dothan, Ala., represented himself.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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