Occasionally, I meet with a potential client who tells me that he doesn’t want to list all of his income, assets, debts, or expenses.  If the potential client doesn’t accept my warnings about the consequences of this sort of bankruptcy fraud, I politely escort them to the door.  That potential client never becomes an actual client.

But does it really matter if you’re honest when completing your bankruptcy papers?  Aside from the obvious moral imperative in favor of honesty, there are practical reasons for avoiding falsifying anything on your bankruptcy papers.  Here for your edification, are a few recent examples of cases involving people who were less than honest in bankruptcy.

I.          Lenny Dykstra

Those of you who are baseball fans will undoubtedly recognize the name Lenny Dykstra.  He is a former New York Mets star who has found himself in a whole heap o’ trouble for his non-baseball activities.  His recent woes should serve as a warning to people who don’t want to be honest when completing their bankruptcy papers.

Richard Winton of the Los Angeles Times reported in the June 28, 2012 issue:

Former New York Mets star and self-styled financial guru Lenny Dykstra, already sentenced to three years in state prison for a car scam, has agreed to a plea deal on federal bankruptcy fraud charges after allegedly looting his mansion of valuables as he struggled to battle numerous creditors.

All of this goes to show that you must list all of your assets in your bankruptcy papers, and deal with those assets according to the requirements of the Bankruptcy Code.

II.        Duane Allen Eddings

Mr. Dykstra is not alone in having to face some unpleasant music as a result of committing bankruptcy fraud.  According to the IRS’s “Examples of General Fraud Investigations – Fiscal Year 2012”:

On April 24, 2012, in Sacramento, Calif. Duane Allen Eddings, of San Francisco, was . . . found guilty of bankruptcy fraud.  In his bankruptcy petition, Eddings understated his income from the Ponzi scheme by millions of dollars, failed to disclose bank accounts and ownership interests in various entities, and failed to disclose his current possession or recent transfer of expensive items.  He also falsely listed a debt of $2.5 million . . . that he did not owe.

The moral:  you must honestly and accurately list in your bankruptcy papers all of your income, assets, debts, expenses, and relatively recent transfers of assets.

III.       Paige Kinney

And here’s an excerpt from an article, entitled:  “Former Countrywide Loan Officer Sentenced to 15 Years in Prison and Ordered to Pay $22 Million in Restitution” on the FBI’s Phoenix Division website:

[Paige Kinney, aka Jamie Lee Lawler, 43, of Phoenix] . . . declared bankruptcy and then attempted to hide assets and liabilities from the bankruptcy court by falsifying her name and social security number . . .  Judge Wake noted that the defendant engaged in a “breathtakingly aggressive fraud” when sentencing Kinney to 10 years in prison on the mortgage fraud scheme and to five years in prison on the second indictment, to run consecutively to the mortgage fraud sentence. Judge Wake also ordered Kinney to pay $22,000,000 in restitution.

In fairness, all three of the above-discussed malefactors were guilty of more than just bankruptcy fraud.  But their cases – and many other cases – illustrate the folly of engaging in bankruptcy fraud.  Yes, Virginia, there really is an FBI, and it really does investigate bankruptcy crimes.

Of course, Messers Dykstra and Eddings, and Ms. Kinney were not left without some consolation.  Each will receive free room and board compliments of the U.S. taxpayers in federal penitentiaries rather than state penitentiaries (Mr. Dykstra is currently in state prison, but he’ll eventually move up to federal prison).  After all, isn’t it better to be in a federal prison than a state prison?  I assume so, in spite of the fact that I have never been in either, because the bankruptcy courthouses around here are much nicer than the state ones.

When I go into a state courthouse I feel as if I should have had shots before entering – especially before entering the restrooms, where feral savages have carved their initials in the mirrors and the toilet seats, and left organic treats in the urinals and on the floor.

When I go into a bankruptcy court, it’s clean and well-maintained.  And unlike the state courthouses, I never hear some lunatic shouting that he’s going to kill his live-in girlfriend and chop her into pieces to feed to the dog.  Instead, I hear the calm, evenly modulated tones of rational legal discourse.

On that irrational basis I have concluded that a stay in a federal penitentiary is preferable to one in a state penitentiary.

But wouldn’t it be better to avoid a stay in any prison?  Tell the truth in your bankruptcy papers and you won’t face the fates of Messers Dykstra and Eddings, and Ms. Kinney.

IV.       Pasadena Bankruptcy Attorney

Finally, you might wonder about the fate of an attorney who misrepresents facts in a client’s case.  Some time ago I wrote about the fraudulent practice of property dumping in Chapter 13 bankruptcies.  The practice is now referred to as “bankruptcy hijacking”.

On July 2, 2012 a Pasadena attorney was disciplined for engaging in bankruptcy hijacking in 82 separate cases.  Part of her punishment is that she is barred from having anything to do with bankruptcy cases in the Central District of California for the next five years.  The discipline report will be sent to the California State Bar for further action, so her troubles are not over.

The moral here:  if you are a bankruptcy attorney, do NOT cut corners or engage in anything that has even a hint of impropriety.  The consequences could ruin you.