Bankruptcy

Preservation of records prior to filing for bankruptcy

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There are certain things any business owner must do in preparation for bankruptcy.  You must make sure you know how much money you have spent and on what; you must know how much income your company has brought in over the past two years; you must know what accounts payable and receivable are still outstanding.  In essence, you must be very careful to preserve all corporate records.  If you do not, and a creditor or the Bankruptcy Court Trustee finds out, then you may not be entitled to a bankruptcy discharge.If a business owner fails to keep or preserve recorded information from which his financial condition and business transactions might be ascertained then the bankruptcy court may not grant the business or individual a discharge of his or her debt pursuant to 11 U.S.C. § 727(a)(3).  More specifically, under the Bankruptcy Court law, if 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, then a discharge of debt shall be denied.

The rationale behind this rule is that the a Debtor must ?give creditors and the bankruptcy court complete and accurate information concerning the status of the debtor’s affairs and to test the completeness of the disclosure requisite to a discharge” In re Martin, 554 F.2d 55, 57-58 (2d Cir.1977)   This section of the code is in place to ensure that a creditor has the ability to determine if the debt owed to them was either entered into with intentional fraud or deceptive intent. ?
With the foregoing stated, it is a very difficult thing for a creditor to stop a discharge for poor record keeping.  The initial burden lies with the creditor to demonstrate that the debtor failed to keep and preserve any books or records from which the debtor’s financial condition or business transactions might be ascertained. White v. Schoenfeld, 117 F.2d 131, 132 (2d Cir.1941). If the creditor shows the absence of records, the burden falls upon the Debtor filing for bankruptcy to convince the court that the failure to produce certain records was justified. ID; see also In re Sandow, 151 F.2d 807, 809 (2d Cir. 1945)  However, there is no specific case law that indicates what constitutes justification, but rather the court looks at reasonable person standard.  Underhill, 82 F.2d at 259-60; see also Meridian Bank, 958 F.2d at 1231 (stating that “[t]he issue of justification depends largely on what a normal, reasonable person would do under similar circumstances”). It is a “loose test, concerned with the practical problems of what can be expected of the type of person and type of business involved.” Morris Plan Indus. Bank of N.Y. v. Dreher, 144 F.2d 60, 61 (2d Cir.1944).
As a result of this standard, it is highly advisable to make sure you keep back ups of your computer and paper records, and that you take steps to ensure that those records are in your possession should you ever need to produce them.  This practice will certainly streamline your bankruptcy process.

As always, if you have any questions regarding this or any other business practice associated with the preparation for bankruptcy, you should contact a local bankruptcy attorney.

Full post as published by Bankruptcy Articles & Blog on June 05, 2009 (boomark / email).