Because of her financial circumstances she had problems purchasing the condominium by herself and therefore enlisted the assistance of her son. On August 27, 2009 she entered into a purchase agreement with her son and daughter-in-law. The terms of the agreement were that Debtor was to contribute $150,000.00 to the purchase price and her son was to take out a mortgage in the amount of $50,000.00 to cover the remaining purchase price and closing costs.
The Purchase Agreement provided that title was to be held in her son’s and daughter-in-law’s names. It also provided that Debtor could live in the property for as long as she wished and that if she wanted to sell the property Debtor would receive her investment back.
In this case the court had to decide whether the transfer of $145,000.00 to her son within one year of her filing bankruptcy was made with the intent to defraud, hinder, or delay her creditors and if so whether Debtor should be denied a discharge pursuant to 11 U.S.C. 727(a)(2)(A). The court also had to decide whether the failure to list this transfer on the Statement Of Financial Affairs was a false oath for which her discharge should be denied.
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In order to prove Debtor violated 11 U.S.C. 727(a)(2)(A) the Chapter 7 trustee had to prove actual fraud. Because actual fraud is difficult to prove the court indicated there were several ‘badges of fraud’ which could be examined. Some of those badges of fraud include (1) the lack of consideration for the transfer, (2) the family relationship or close relationship between the parties, (3) the retention of the possession of the property by the debtor, (4) the financial condition of the party at the time of the transaction, and (5) the conveyance of all the debtor’s property.
In this case, the court did not find that Debtor acted in fraudulent intent when making the Purchase Agreement with her son and daughter-in-law. It noted that at the time of the Agreement Debtor owed $100,000.00 in unsecured credit card debt but had been making those payments on a timely basis until the credit card companies universally increased the interest rates on all of her credit cards. She had run out of money and was unable to pay her credit cards on her pension and social security income.
In sum the court looked at the Purchase Agreement merely as a way for Debtor to purchase the condominium which she could not have done by herself.
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However, the court did deny the discharge to Debtor based upon 11 U.S.C.727(a)(4)(A) on the basis she made a false oath. This particular section requires proof that a debtor (1) made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false when making it; (4) the debtor fraudulently intended to make the statement; (5) the statement materially related to the bankruptcy case.
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Because the Purchase Agreement and transfer of $145,000.00 were not listed on her schedules, the court denied the discharge. Importantly, the Debtor’s attorney had been informed about the transaction. Although she and her attorney were aware of the legal issue, she testified that she did not list the transfer because she ‘never thought about it.’ However the court was not persuaded by this and pointed out that even when she was made aware of the issue, the amendment to her bankruptcy schedules was not made until four months after her Meeting of Creditors hearing.
Interestingly, the court pointed to case law decisions which indicated that “a false statement resulting from ignorance or recklessness does not rise to the ‘knowing and fraudulent intent.” In fact, the court went on to state that it is well “established that a court may consider the debtor’s subsequent voluntary disclosure as evidence of innocent intent.’
The simple lesson to be learned is to be truthful in your bankruptcy petition. If you have questions about Chapter 7 bankruptcy in Tennessee or Chapter 13 bankruptcy, please visit our state pages.
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