Understanding Bankruptcy, 3/23/18

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Question: What Lenny Dykstra can teach you about the perils of bankruptcy fraud.

Bankruptcy fraud is back in the news today, with the indictment of Lenny “Nails” Dykstra on charges of bankruptcy fraud and obstruction of justice. The indictment accuses Dykstra of looting his mansion of furniture, fixtures and memorabilia that belonged to his bankruptcy estate, and selling or destroying those items. Dykstra’s attorney maintains he did nothing wrong.

The story is interesting because of the outsized personality of the undersized major-league player, because of his reputation as a financial guru to other professional athletes, because of the outsized mansion, and because of the value of the property allegedly looted-$400,000, according to the bankruptcy trustee.

It may be tempting to dismiss the case as another instance of wealth and celebrity attracting the attention of law enforcement. It may be tempting to assume that such prosecutions don’t affect the “little guys” who file bankruptcy. Tempting, but wrong.

In the 20-some years that I’ve been practicing bankruptcy, I’ve had a lot of conversations with a clients who don’t want to make the full disclosure that the bankruptcy laws require. Much of that reluctance is understandable, and isn’t based on any intent to deceive or defraud creditors.

They don’t see why they have to list debts they intend to continue to pay, or they don’t want family members or employers to find out about a bankruptcy. Sometimes the intent is less innocent, as they try to retain some property to use to start over after bankruptcy.

But here’s the thing about bankruptcy: Full disclosure is the price of admission. Period. There are no half measures.

You can’t list some of your creditors and leave out others, even if you intend to pay them.

You can’t list some of your assets, and keep quiet about others. It doesn’t matter if the asset has no value to anyone but you.

You can’t give your property to someone else to hold for you until you get out of bankruptcy. And you can’t file bankruptcy and then sell your stuff, assuming that no one will find out. It’s really simple.

As in the old saying – if you want to play, you’ve got to pay.

In case you are wondering whether the little guys get charged with bankruptcy fraud, wonder no longer. A hotdog vendor and a cosmetics saleswoman are two South Carolina defendants that come to mind. The latter case occurred some years ago, but involved an inventory of cosmetics that would have had little or no value to a trustee had the debtor disclosed it, but she ultimately went to jail for concealing assets.

In my experience, those charged with policing the bankruptcy system are just as serious about the cases you’ll never hear about.

Trust me – it’s just not worth it. Just ask Lenny Dykstra.

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