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SECTION 727 (a)(3) of the new bankruptcy code states that the court shall not give a discharge to the debtor who "has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case."
In re Gubellini, debtor failed to identify the payees of all of his checks and withdrawals from his checking accounts. In addition, debtor routinely disposed of all of his cancelled checks. His checking account registers were poorly detailed. The court thoroughly examined the debtor’s checking account register and bank statements for the period 2004 through 2006 but the court could not identify how more than a third or $75,000 of the debtor’s money was spent during that time frame. The court found it’s inability to identify how such a large amount of money was spent very troubling and said that the plaintiff had satisfied her burden to prove that the debtor failed to keep or preserve recorded information from which his financial condition might be ascertained.
Debtor could still have obtained his discharge if he was able to justify that his failure to keep records was justified under the circumstances of the case. For instance, if debtor could have shown the court that someone else like a bookkeeper had the responsibility of recording the payment transactions and that he had relied on that bookkeeper to keep his financial records accurate, debtor would still have gotten his discharge. I see many clients who obtained home equity loans or second trust deeds for large amounts. It is not uncommon to see Heloc lines of $100,000 to $200,000 that have been totally used up by the time clients want bankruptcy relief. In situations like this, debtors are well advised to keep financial records of how the money was used. Debtors should keep copies of cancelled checks evidencing where the money went. Sometimes cash was used to pay for home improvements and there are no cancelled checks. Have the contractor sign receipts for the cash payments made, and keep receipts for cash payments of materials used. Require the contractor to give you a written contract for the home improvement job clearly spelling out the nature of the work to be done and the cost of the contract. If possible, get a copy of the driver’s license and the contractor’s license of the home improvement contractor.
