In Bankruptcy Information, Bankruptcy Questions

Michael Free
In what a United States Court of Appeals described as a “bizarre case,” a debtor unnecessarily filed bankruptcy, hid assets from the trustee, lied to the court and ultimately ended up with a 24-month prison sentence followed by three years of probation.

Michael Free, a sole proprietor who owned Electra Lighting and Electric Company and Freedom Firearms (a dealer in World War II-era firearms) filed bankruptcy, ostensibly to prevent a foreclosure. In his schedules he listed $1.3 million in real property and $368,990 in personal property, including $250,000 in firearms. He claimed $671,000 in liabilities. Quick arithmetic shows he had about $1 million excess assets over his liabilities, so the obvious question is, why file in the first place. Initially he filed Chapter 13 but it was later converted to Chapter 7.

Throughout the course of his bankruptcy Free hid assets from the bankruptcy trustee and the court, refused to cooperate with the trustee, ignored court orders and sold assets that belonged to his bankruptcy estate, using the money from the sale of those items to purchase items at auction from the trustee. Eventually both the bankruptcy court and the trustee became weary of Mr. Free’s shenanigans and referred the case to the FBI for investigation of possible bankruptcy fraud.

This resulted in a prosecution for bankruptcy fraud. After a five-day jury trial Free was convicted on all counts. Because his sentence is governed in large part by the Sentencing Guidelines, which rely on the amount of loss caused by the fraud, an interesting issue arose. The bankruptcy trustee was ultimately able to find and sell enough assets that all Free’s creditors were paid in full. Free’s criminal defense attorney argued that because of this there was no loss caused by his fraud and Free should be sentenced accordingly.

The district court and the Third Circuit Court of Appeals didn’t buy that argument. Both said that Free intended to cause loss equal to the amount of the value of the assets he hid, which were close to $1 million. These assets were in addition to those Free listed in his schedules. Although the Court of Appeals did not agree with the 14-level enhancement imposed by the District Court, it remanded the case for resentencing and suggested that the lower court could apply an upward departure from the Guidelines for “significant disruption of a governmental function.”

The Moral of the Story
Michael Free’s story has a moral for all who file bankruptcy: DON’T LIE. The theory behind bankruptcy is that the honest debtor exchanges all of her non-exempt property in return for not having to pay bills that typically total many times more than the property she gives up. It’s more than a fair trade. In many cases, it’s like saying, “I’ll give you a penny if you’ll let me out of $100 in debt.”

Some people can’t see the benefit of such a trade. They think about the boat or the ATV or the diamond bracelet they might have to give up and decide they can have it both ways. So, they do something really stupid like change the name on the title of the boat or ATV to their brother, or “give” the bracelet to a friend with the understanding that the debtor will get it back after the bankruptcy.

When those kinds of things happen and the courts find out about them, there’s very little sympathy from judges or prosecutors. Nobody forced the debtor into bankruptcy in the first place; filing is voluntary. Judges don’t like it when people try to game the system, and prosecutors are always happy to make examples of people to show the rest of us what not to do.

The Bankruptcy Attorney
A good bankruptcy attorney will explain what will likely happen to the debtor’s property when she files. A good bankruptcy attorney will help plan for the bankruptcy to minimize what the debtor might have to surrender.

The attorney can do that only if the debtor is forthright and honest about everything she owns. So, don’t be like Mike. Tell the truth.

If you need bankruptcy advice, contact us here, or call or text (801) 413-3708, or email steve@schamberslaw.com.

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