Some people have closed up a business that wasn’t making money. Others have has a part-time or home-based business that made very little (for example, selling Avon, Tupperware, Mary Kay, Amway, etc) and these folks often ask how much they have to report when they are filing for bankruptcy.
The Bankruptcy Code requires a full disclosure of the petitioner’s finances, including any business activities in the past six years, whether or not you made any money or even if the business is no longer operating. However, practically speaking, the only detailed information required is business and expense figures for the past 12 months and the prior tax year. Other than that, you must disclose who the officers and owners are and who has custody of the records. Unless there is reason to suspect that the business is being used to hide income or assets, that’s usually all you need to provide.
The disclosure requirement was brought home very clearly in a recent decision in the U.S. Court of Appeals for the Seventh Circuit (Stamat v Neary, No. 09-3448, March 24, 2011).
In the case of Dr. Nicholas Stamat, a medical doctor, and his wife Penny, who did his billing, Dr. and Mrs. Stamat made a number of false statements and omissions. The omissions included failure to list their interest in a couple of businesses, even though the assets had been sold 3 or 4 years prior to filing, no profit had been made and the businesses no longer existed.
The Court of Appeals, citing §727(a)(4)(A) of the Bankruptcy Code, affirmed the lower courts’ denial of discharge, on the grounds that the Stamats “knowingly and fraudulently, in or in connection with the case . . . made a false oath or account…”
As the Court pointed out, Question 18(a) of the Statement of Financial Affairs (the “SOFA”) portion of the bankruptcy petition, states:
If the debtor is an individual, list the names, addresses, taxpayer identification numbers, nature of the businesses, and beginning and ending dates of all businesses in which the debtor was an officer, director, partner, or managing executive of a corporation, partner in a partnership, sole proprietor, or was self-employed in a trade, profession, or other activity either full- or part-time within the six years immediately preceding the commencement of this case, or in which the debtor owned 5% or more of the voting or equity securities within the 6 years immediately preceding the commencement of this case.
Going even further, the Court pointed out that in addition to basic information, such as the name, address, tax ID, nature of the business and beginning and ending dates, individuals who have been in business in the past six years (except those who were only limited partners) must also provide detailed information about each such business required by Questions 19-25 of the SOFA, such as identifying keepers of financial records and auditors for the past two years, as well as the names and addresses of the other owners and officers.
In what was surely a surprise to the Stamats, the Court even held that while overstating their income (as compared to their tax return) was not by evidence of fraudulent intent, considering “the totality of the Stamats’ omissions and errors (the over-reporting) rises above mere negligence to the level of reckless disregard for the truth.”
The bottom line is this: If you are not sure whether or not to disclose some past or present business activity on your bankruptcy petition, it’s better to consult with your attorney than to risk denial of discharge.