Why the Chapter 7 Bankruptcy trustee wants to see your bank statements (PART 1)
About 30 days after you file your Chapter 7 bankruptcy petition, you must attend something called a “341 meeting” or “creditor’s meeting.” It is called the 341 meeting because it is required per Section 341(a) of the bankruptcy code, which states that “within a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors.” It is called a creditor’s meeting because your creditors – the people you owe money to – are permitted to appear at the meeting and ask you questions about the debt that you owe them.
Creditors, however, very rarely attend creditor’s meetings. In fact, in my 15 years of practice, I can’t recall a single time where a creditor actually showed up at a creditor’s meetings. What normally happens instead at a 341 meeting is that the trustee will follows the requirements of Section 341(d) of the bankruptcy code and, in the language of the statute, “orally examine” the debtor to make sure that the debtor’s bankruptcy petition is truthful and accurate and the debtor qualifies for a Chapter 7 discharge of his or her debts.
Prior to the meeting, the Trustee will ask that a debtor’s attorney produce certain financial documents such as tax returns and paystubs. They will also ask for bank statements. Sometimes six months of statements for each of your accounts, sometimes a year’s worth of statements. It depends on the trustee. When I was new at bankruptcy work, I figured that the trustee just
wanted to see how much money the debtor had in their account when they filed, and to make sure no large amounts were withdrawn and, presumably, hidden under the debtor’s pillow just before they filed.
Since then, however, I have learned there is other valuable information laying unnoticed in a debtor’s bank statements, and I’d like to discuss two of them in this space. Today I will discuss something called bankruptcy planning and hiding assets, and in my next post I will discuss income verification.
Bankruptcy planning and hiding assets.
OK, so maybe a lot of debtors are too smart to suddenly transfer a large amount of money out of their bank accounts to hide it from the trustee. Instead, they will draw their accounts down prior to the bankruptcy on things like rent, Costco
runs, filling up the car with gas or getting any much-needed repairs done, and that’s perfectly fine. That’s perfectly OK. It’s what we in the business call “bankruptcy planning.” As long as you don’t do anything really nuts like drawing down your bank accounts by buying flat screen TV’s for all your neighbors (that actually happened, though not to one of my clients) you can spend
your money as you see fit.
What’s not perfectly fine, however, is withdrawing money and hiding it under your pillow. Whether it’s in your bank account or under your pillow, your money is still an asset that may be subject to liquidation and distribution by the trustee. If the trustee sees a lot of cash withdrawals in the months before the bankruptcy, they will ask questions, like: Is that cash under your pillow? Likewise, if they see that a lot of money was transferred out of your accounts to other people via Zelle or Venmo, they will also ask questions, like: is that cash now under your friend’s pillow, and have you two made an agreement that they will give it back to you as soon as your bankruptcy is closed? You just don’t want to open up a can of worms with the trustee. At the very least, it may lead to a deeper examination of your finances that will cause you more stress than you need for quite a few months.
I always tell my clients that it they are practicing bankruptcy planning by drawing down their accounts legitimately, they should not do it by cash transactions. Instead, they should use their debit cards, so that the identity of their payee will be readily apparent by the transaction entry on your bank statement, and so will not raise any red flags.
Next: How bank statements can be used to verify your income.