In re: Varney, No. 10-41896-JDP (Bankr. D. Idaho, April 25, 2011)
What happens when a debtor gets a new source of funds after filing Chapter 7 bankruptcy, and fails to disclose them to the bankruptcy court?
In this case, the debtor, Christine Varney, filed for Chapter 7 bankruptcy. At the time, she was in the process of appealing her Social Security Disability denial of funds. She believed it was unlikely that she would be awarded funding, and her attorney informed her that, even if she were, those funds would be exempt under the bankruptcy code. She therefore did not inform the bankruptcy court of the pending appeal or potential to receive funds. However, she was later granted the funding, and put it in a bank account under her father's name.
Within the next couple of months, Christine used all $40,000 granted to her from Social Security Disability funding. When questioned during the creditor's meeting, she lied about funds and other various details. The trustee's research revealed some of Christine's lies, and when confronted, Christine confessed to the SSD award.
The trustee sought to recover the lost SSD assets in order to pay creditors, and Christine moved to claim the funds exempt under Idaho exemptions. The trustee argued that the exemption was lost because the debtor intended to conceal the benefits.
However, the court granted Christine her exemption, reasoning that the trustee had the burden to prove Christine's bad faith intent by a preponderance of the evidence. Originally, the debtor was informed that even if she received the SSD funds, they would be exempt, suggesting that she originally had no bad intent. Further, exemption statutes are to be liberally construed in the favor of debtors. While Christine failed to list her pending SSD claim on her schedules to the court, she did disclose them to her attorney, and later to the trustee. While she did not come clean during the creditor meeting, she was not asked directly whether she had come upon new funding during the interim between filing and the interview.
While the court gave Christine the benefit of the doubt, similar cases have gone the other way. In such a case, concealment from the court could be disastrous, especially since the funds would have been exempt anyway, and Christine risked losing them to creditors by failing to disclose their existence.
