Individual Business Owners Can Lose the Right to Discharge Their Debts in Bankruptcy
The ultimate goal of every individual filing bankruptcy is to be released, or discharged, from the obligation to repay debts. Bankruptcy laws put conditions on being released from this obligation, and if an individual conceals assets, lies about their finances, or fails to keep adequate records, a bankruptcy court has the power to deny a discharge of all debts owed. The Sixth Circuit Bankruptcy Appellate Panel (BAP) recently issued a ruling that offers a “how not to do this” example for individual business owners. The case is McDermott v. Perez (In re Perez), BAP Case No. 18-8036 (December 30, 2019).
Mr. Perez was a Cleveland, Ohio police officer for 20 years and he also worked in the private security business for a friend’s company – Gracetech. When his friend passed away, Mr. Perez started his own security company and took over Gracetech’s only account. Gracetech sued and won a judgment against Mr. Perez and his new security company – Precision – for over $450,000. Mr. Perez filed a chapter 7 bankruptcy in 2015, seeking to discharge his personal liability for this judgment.
Assets and Liabilities
Mr. Perez listed his ownership of Precision as one of his assets, but valued it at zero. When asked by the bankruptcy trustee about Precision’s assets, Mr. Perez disclosed vehicles and equipment, but no real property. Mr. Perez took the position that with the judgment against it, Precision had no value. The bankruptcy court ruled that the value of Precision should have been disclosed without consideration of the judgment against it. In other words, if you own a company and have to value it for a bankruptcy, you should not deduct the amount of company debt from the value. That doesn’t mean you can’t also disclose the amount of debt the company owes, which is the best practice.
Precision operated out of a building it purchased in June, 2015. In August, 2015, Precision transferred the property to a different company Mr. Perez founded (whether he owned it was unclear) – T69P. Mr. Perez failed to disclose the existence of T69P or the real property it owned as an asset in his bankruptcy schedules. Finally, Mr. Perez (like many small business owners we see) used the company credit card and bank account to pay personal expenses and declared those payments as income on his tax returns. However, it appeared he did not include all such payments in the income he reported in his bankruptcy.
Consequences of Not Disclosing Assets
After a trial in April, 2018, the bankruptcy court found that Mr. Perez was not entitled to a discharge because of the several “false oaths” he made in connection with his case. Mr. Perez appealed, but the BAP agreed with the bankruptcy court and affirmed. Specifically, the BAP agreed that Mr. Perez should have disclosed his interest in T69P (either as a separate company or an asset of Precision); that he could not adequately explain differences between his reported business income and what was reflected by credit card and bank statements; and that giving Precision a zero value was a false statement, despite the large judgment against it.
The bankruptcy papers filed to begin a case are signed under oath, and testimony at a meeting of creditors is given under oath. If you don’t make full and complete disclosure of your assets (or other financial matters), you run the risk of not receiving a discharge of your debts. The Perez case is a good example of just how careful and detailed a small business owner must be if they choose to seek relief from debts through bankruptcy.
Every business is different, but keeping your personal finances separate from those of a closely-held business can be critical in bankruptcy (and for many other reasons). And, it’s better to “over-disclose” information about business assets and income in an individual’s case than to risk losing a discharge by omitting, or concealing, that information.
 The bankruptcy court delayed the trial because Mr. Perez resigned from the police department and pleaded guilty to a criminal charge in May, 2017.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.