Bad Bankruptcy Advice Can Spell Disaster
The Miller case out of the Northern District of California is a good example of how important it is to receive sound legal advice during a bankruptcy case. Debtor Carla Miller filed her Chapter 7 petition on August 8, 2013. Her schedules, made under oath and written in her own hand, disclosed that she was self-employed in the jewelry business, had no inventory, and between $6,000 and $7,000 in personal jewelry. Miller valued her home at $1,550,000, which meant there was no equity in the home.
Miller’s case was a classic “no asset case,” but at the 341 meeting the Chapter 7 trustee discovered that the bankruptcy schedules were not accurate. Miller failed to disclose business inventory in her jewelry business that amounted to $50,000 at wholesale values. Additionally, her home was estimated to be worth $2,300,000, which meant that there was equity available to pay her creditors.
Miller asked the bankruptcy court to dismiss her case and claimed that she received bankruptcy advice from a business that was practicing law without a license. In the alternative, she asked to convert her case to a Chapter 11, should the court deny her request to dismiss.
The bankruptcy court pointed out that there is no statutory right to dismiss a Chapter 7 case, therefore the debtor has a heavy burden to persuade a court to dismiss her case on account of “fairness.” In addition, even when there is a statutory right to dismiss, that right may be forfeited if the debtor has engaged in bad faith conduct.
In this case the court found that Miller had filed false schedules in bad faith. The court stated:
Nothing in Miller’s pleadings or her declaration or her address to the court convinces the court that there are equitable considerations militating in favor if dismissal. To the contrary, the court found her intelligent, calculating and undeserving of sympathy. She underestimated the seriousness of a bankruptcy filing and the diligence of a bankruptcy trustee. There is no equity in allowing her to escape the consequences of her actions.
The court pointed out that the trustee, creditors and the real estate agent stood ready for payment from the proceeds of selling Miller’s non-exempt jewelry and real estate. Dismissing the case would not be fair to these individuals.
Finally, the bankruptcy court denied Miller’s request to convert her case to Chapter 11 (and thereby have a better opportunity to protect her assets). The court said that bad faith conduct is a bar to conversion as well as dismissal.
The Miller case is a prime example of how quickly a bankruptcy case can turn bad without the leadership of a seasoned bankruptcy attorney. Reliance on bad advice is generally not a valid excuse, so it is important to get your advice from someone who knows bankruptcy law and who can protect your legal rights.