Under What Circumstances Can a Trustee Object to A Discharge?

A trustee can object to a discharge if there’s been some amount of fraud in the bankruptcy case. When you’re filing for bankruptcy, you are asking for equitable relief and under the law. Under the “Clean Hands Doctrine” if you are asking the bankruptcy court for equitable relief, you are required to be honest with the court. If you are found to be committing fraud upon the court or upon the creditors, such as by concealing an asset or lying about the value of an asset, the trustee may very well file what’s called a 727 objection. A 727 objection is the trustee or creditor asking the court to deny the discharge on the grounds of fraud because something is being concealed and you’re not availing yourself of the requirements of the court to be honest with the court in all of the inquiries.

If you’ve been hiding assets, if you’ve grossly undervalued assets or you lied about a particular transaction, the trustee would be within his or her rights to file a 727 denial of discharge complaint and then it would be your responsibility then to defend against it and to convince the court why it was either an excusable mistake as opposed to an intent to commit fraud. These 727 objections are very rare, especially if you have a bankruptcy attorney. Part of the job of the bankruptcy attorney is to conduct a thorough assessment of your assets and make sure that we’ve left no stone unturned before we file your case so that there are no mistakes that could be confused for fraud. It is also the attorney’s job to make sure that the trustee is not going to try to get the court to undo your bankruptcy discharge or deny your bankruptcy discharge because something that was important was omitted from the schedules.

What Is The Bankruptcy Trustee Looking For In The Schedules?

In chapter 7 and chapter 13, there are panel trustees but there’s also the United States trustee. The United States trustee is actually an officer of the Department of Justice. The United States trustee’s duty is to examine the information reported in the means test and the information reported on schedules I and J of the petition. Schedules I and J provide the income and expenses. The U.S. trustee is focused on that information is because it’s the U.S. trustee’s duty to make sure that the qualifications are appropriate for bankruptcy. For example, in chapter 7, there are two hurdles in order to get into a chapter 7 for qualifications and they are both based on income.

The first one is the Means Test or Form 22A of the petition, and the other one is the monthly budget which is disclosed on schedules I and J of the petition. The U.S. trustee’s role is to look at the means test numbers and make sure that the qualification for chapter 7 is appropriate. If it’s particularly close or the U.S. trustee is concerned about the qualification, the U.S. trustee may conduct what’s called the 707b inquiry, in which they request documents from the debtor, such as the 6 months of pay stubs that were used to populate information on the means test, bank statements, particular monthly expenses that are claimed on schedule J, things of that nature.

These 707b inquiries are not terribly common; if you have a good bankruptcy attorney who is dotting their I’s and crossing their T’s, then this additional inquiry is not very common. The panel trustee for a chapter 7 is most closely focused on schedule A/B and schedule C. It used to be schedules A and B were separate. Schedule A had real estate interest on it; schedule B has personal property interests which were everything else that you owned. In December 2015, the advisory bankruptcy rules committee actually revised the bankruptcy forms and now schedule A/B had been combined into one schedule. So the chapter 7 panel trustee is focused on schedules A/B and C which detail the assets and the claimed exemptions. The chapter 7 panel trustee would also be focused on schedule D which would list out any secured debts and so secured debts can be important to determine how much equity there may be in a particular asset.

If you have a mortgage against your home, the mortgage is a secured debt because the home served as collateral for the mortgage, and the mortgage lender has a lien on that collateral. What you are protecting when you are exempting the asset, (i.e., exempting from the bankruptcy estate) is actually the equity in your home. For example, if you have a home that’s valued at $200,000 and you have a $100,000 mortgage against it, you don’t have to exempt all of the value of the house because there is a $100,000 lien against it from the mortgage. You only have to exempt the $100,000 of equity in it. So the trustee would be looking to schedule D to determine what lien interests there were in the particular assets and to make sure that the equity exemptions were appropriate.

The chapter 7 panel trustee is also going to be focused on what is called the statement of financial affairs, or as we refer to it by its acronym SOFA. The statement of financial affairs asks questions about particular types of transfers. These are the look back periods that the bankruptcy laws focus on to determine if there were any transfers, that could be deemed “fraudulent” or payments to creditors, that could be deemed “preferential.” These can be other areas where the trustee may be able to get some funds on behalf of the creditors to add money to the bankruptcy estate. In a chapter 13 bankruptcy, a chapter 13 panel trustee would be focused on schedules I and J which detail the income and expenses because again, the focus of the chapter 13 panel trustee is the monthly budget.

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