I am not a lawyer, I am a judgment broker. This article is my opinion, and not legal advice, based on my experience in California. Laws vary in each state. If you ever need any legal advice or a strategy to use, please contact a lawyer.
What if you have a judgment against a “rich” judgment debtor with a history of moving from rental property to rental property, paying the minimum to obtain residence, and then staying rent free until they get forced out by evictions? (This does not happen very often anymore, in the age of credit reports and landlord associations, however a wad of cash upfront, can blind many landlords.)
What if you found out where your judgment debtor works, garnished their wages, and then you got a notice from a US Bankruptcy Court, that your debtor has filed for Chapter 7 bankruptcy protection?
As soon as you get that bankruptcy notice, you should have quickly tell the Sheriff to stop the wage levy. Once someone files for bankruptcy protection, you should not try to collect money from them without first getting permission from the bankruptcy court.
When your judgment debtor files for bankruptcy protection, is it game over, and your judgment is usually history, if your judgment debtor is actually poor.If your debtor is not poor, hiding their assets, and a crook; and you have the time and money to spend many hours in bankruptcy court, maybe not.
If you have nothing more important to do, you can examine crooked judgment debtors in bankruptcy court, even with a small judgment. If you are busy, this makes sense only on judgments averaging $15,000 or more. If your judgment debtor is really poor, let it go, do not waste time trying to squeeze juice from rocks.
To bring your judgment debtor’s fraud and perjury to the attention of a bankruptcy court, requires filing an adversarial claim. If you are not a lawyer, you better know what you are doing, or better yet, hire a bankruptcy lawyer. When you hire a lawyer, do not put your brain on hold, keep thinking about what will help win your case, and give your ideas to your lawyer. Never assume your lawyer knows everything you know.
One might think the judgment debtor’s history of defrauding landlords could be a basis for a fraud complaint in a bankruptcy court. I am not a lawyer, and my opinion is that if the debtor defrauded someone else, you will have a difficult time claiming fraud in the bankruptcy court; because you were not a party to the cause of action, and not personally defrauded by the debtor.
However, if you were the debtor’s landlord, you might have a possible cause of action for rental fraud, stemming from the original debt under USC 523(a)(2)(b). To win such a motion, you will need to show some proof to the court.
To win a motion under USC 523(a)(2)(b), you would need to prove that the fraud was intentional, and that your judgment debtor knowingly and willfully provided you and the court with false information. Some items of evidence could be a rental application signed by your debtor, with fraudulent statements about their finances.
If your judgment debtor’s misrepresentations were verbal, perhaps you could prove fraud under USC 523(a)(2)(a), however proving that is usually much more difficult.
The first step to proving fraud in court is investigation. There are several paths available for the creditors of bankrupt debtors. When debtors file for bankruptcy protection, their financial privacy goes out the window.
The key to winning a bankruptcy complaint for fraud, is plenty of discovery and hard evidence proving the fraud. The first step is to ask the attorney representing the bankrupt judgment debtor for the debtor’s filing information and disclosures, asset and liability statements, and itemized listings of their monthly living expenses.
One idea, is to request copies of the debtor’s tax returns at least 14 days before the first scheduled meeting of the creditors. You might ask for five years of state and federal tax returns, or the tax returns from a few years before and after the fraud occurred. See 11 U.S.C. Section 521(e)(A)(ii).
If you are not a lawyer, be sure to check whether the particular judge in your debtor’s bankruptcy case allows appearances by pro se creditors, if not, it is best to hire an attorney to present your motion to dismiss the debtor’s BK.
On PACER, look for the case of Heal, Larry T. Northern Dist. of CA, 09-13026. The tax returns must be requested before the creditors meeting. If they are not supplied, the code says the BK shall be dismissed.
Depending on the response you get, you might decide to motion the court for a rule 2004 examination of the debtor and possibly some other third-parties, perhaps right after, or before the first creditor’s meeting.
If you have a dishonest debtor, they often try to stonewall and hide information from creditors. Once the debtor files for bankruptcy, creditors are entitled to access their financial information, so that you can thoroughly analyze their real situation.
If you are deprived from doing your discovery in bankruptcy court because of actions from the debtor, then you may have a cause of action for an adversary proceeding under USC 727, which costs about $300 to file.
In some cases, a simple motion to dismiss the BK for a bad faith filing might be more appropriate and less expensive. You will learn a lot going through a 727 action, and if there was proof of fraud, it may be successful. It may be possible that a non-debtor transferred the property without the debtor knowing it. Look at the credit report to see if there really is a cause for an honest bankruptcy. Be sure to go to the 341 hearing. Ask simple questions like:
1) Do you have bank accounts other than the ones in your schedule?
2) Do you have auto, motorcycle or other vehicles not listed in your schedules?
3) Do you have any real estate in your name in CA or any other state?
Keep quick and casual. You want your debtor to say yes, so you have them on perjury. At the 341 meeting, if you say a ha!, I caught you, the trustee will likely then say to the debtor, “Change your schedules to reflect that you do own it. Any other questions, Mr. creditor” That is what you do not want. Let him misrepresent the facts at the 341 meeting, and file then your motion to dismiss, is a better way to do things.
Bankruptcy court can be a “heaven” for creditors with time, patience, and knowledge. Bankruptcy courts are not perfect, and many BK courts will not let mortals (non-lawyers) pay with a personal check.
Bankruptcy courts are usually more spacious and comfortable than state courts. Most filings and motions (except motions for relief and adversarial proceedings) have no filing fees. Cafeterias in bankruptcy courts are usually good and reasonably priced.
You may be able to get your debtor kicked out of bankruptcy court for either not providing you with the tax returns you requested, or possibly for a bad faith filing for not complying with the court’s order to produce documents under a rule 2004 examination.
Depending on the size of your judgment, you may decide it is simply not worth filing an adversary proceeding. You may also find that your debtor really does deserve to file for bankruptcy protection because they showed you all the documentation you asked for, and you found no evidence of deceit or fraud.