Bankruptcy

"No Conversion from 7 to 13" U.S. Supreme Court Tells Debtor Who Hid Assets

By Jonathan

The United States Supreme Court does not frequently hear cases involving consumer bankruptcy law.  However, this past February, the Supreme Court considered the case of Robert Marrama, a Chapter 7 debtor in Massachusetts.

Mr. Marrama filed a Chapter 7, but failed to disclose on his schedules that he had put title to a Maine vacation house into a trust. He also failed to disclose an income tax refund.  Interestingly, it appears that Mr. Marrama did reveal the existence of the house, but listed his ownership interest (equity) as zero.

The Chapter 7 trustee checked property records and discovered the transfer (it is unclear to me when this transfer occurred, although the transfer itself does not seem to be an issue here).  The trustee filed a motion to undo the transfer and take title to the house for the purpose of selling it.

Mr. Marrama then moved to convert his case from Chapter 7 to Chapter 13.  The trustee objected and the bankruptcy judge ruled against Mr. Marrama as did several other appeals courts.  The case eventually made its way to the Supreme Court, where Justice John Paul Stevens writing for the majority, stated that while honest debtors were entitled to convert their Chapter 7 cases to Chapter 13, a bankruptcy judge is entitled to take away that right because of ?fraudulent conduct."

The case will be sent back to Massachusetts where Mr. Marrama will no doubt lose all of his non-exempt property.  Chapter 7 cases cannot be dismissed without permission of the court and this is clearly not a case where such permission will be granted.

The point here - it is vital that you reveal all of your assets and debts to your attorney and to the courts.  Over the past few years, the United States trustee and Chapter 7 trustees have become much more vigilant in looking for assets.  Recently one of the attorneys for the United States trustee told me that her office's goal is to push people out of Chapter 7 and into Chapter 13.  Chapter 7 trustees are being strongly encouraged to look closely for hidden assets.

Thanks to Scott Sagaria of the California Bankruptcy blog for writing about the Marrama case.

Full post as published by The BK Blawg on July 21, 2008 (boomark / email).