Recently, I wrote here about the story of Jennifer McKinney (the mommy blogger known as MckMama) and her alleged fraud on the United States Bankruptcy Court in the District of Minnesota. In short, Jennifer and Israel McKinney filed bankruptcy, claiming nearly $750,000 in debts, while failing to disclose the extent of their assets and income.

The bankruptcy trustee has asked the court for a denial of discharge of the McKinneys’ debts, based on false disclosures, lack of disclosure, manipulation of income, and destruction of records. In particular, Jennifer McKinney is accused of falsely claiming her blogging income is $1,500 per month, while she was depositing at least $7,000 to $10,000 per month to her bank account. She reported to the bankruptcy court that her income for 2011 was $55,000, while the records for that year show more than $148,000 of income. In addition, certain assets including cash, accounts receivable, personal property, and (very valuable) domain names and websites were not disclosed in the bankruptcy filing.

A denial of discharge of bankruptcy is serious when the trustee is alleging fraud. The result may be that the court does not discharge your debts, and you will be saddled with them for the rest of your life. You also run the risk of criminal charges being brought against you, with large fines and prison time a possibility.

How can you keep yourself out of trouble if you’re filing bankruptcy? It’s not hard. The bankruptcy system in the U.S. was set up to give consumers a chance at a fresh start, but the price to be paid is one of honesty. You must disclose all of your assets, debts, and income before your debts can be discharged. If you are honest about these, you increase your chances of sailing through the bankruptcy process.

Here are 9 tips to help you comply with the law and avoid allegations of bankruptcy fraud in your own case:

1. Handle your finances carefully before filing for bankruptcy –
   • Do not run up a bunch of debts immediately before filing bankruptcy. Creditors could tell the court that you did so purposely and recklessly, and you run the risk of some or all of your debts not being discharged.
   • Do not secretly sell, transfer, or give away any assets prior to bankruptcy without disclosing them to the court.
   • Do not try to selectively pay certain debts before filing bankruptcy. The court could decide that you did so in order to favor those creditors over others.
2. Beware of credit counselors and debt settlement agencies – While there are some legitimate credit counseling agencies out there, consumers need to be very careful in choosing who they do business with. Many consumers try to negotiate or settle their debts instead of filing for bankruptcy. Agencies or attorneys may offer to help you negotiate with your creditors, enter into payment plans, and administer the payment plans for you. Be cautious when paying fees up front, as this is one common way to scam consumers out of money. Understand that you can negotiate on your own with creditors to work out payment plans or reductions in the amount you owe. Debt settlement scams are common, so thoroughly investigate any agency or person you are considering doing business with before you hand over your money or your financial information.
3. Consider hiring an attorney – While consumers can represent themselves in bankruptcy court, an attorney can be helpful when filling out the forms and understanding the process. The concept of fully disclosing all assets, liabilities, income, and transfers of property is pretty simple, but the paperwork can sometimes seem confusing. An attorney can help you understand the forms and how to fill them out correctly. The bankruptcy law is complex, so if you have anything other than the simplest case, you should consult an attorney.
4. Avoid bankruptcy filing scams – Beware of attorneys and consultants who suggest you file a false petition in bankruptcy court. These are sometimes referred to as “petition mills.” They may suggest using a fake social security number, filing several bankruptcy cases in different states, or lying about income and assets. If anyone suggest that you lie in your bankruptcy paperwork, run away from them as fast as you can and find a new professional to help you.
5. Gather all documentation – Carefully gather all account statements related to your debts and assets. Make a list of any assets for which you don’t have documentation, and do your best to assign fair values to those items. Don’t try to guess and don’t try to lowball the figures. Don’t get careless or sloppy in reporting your assets and liabilities. In case any of the items in your bankruptcy are questioned, you should have documentation to back up your claims.
6. Make a full disclosure – Disclose all assets, income, and other information requested on the bankruptcy forms and schedules. The court relies on this information to determine whether any of your creditors will receive money toward what you owe them. The court is also relying on your honesty in reporting your income, as you will have to complete a “means test” to see if you have the ability to repay some or all of your debts. Yes, the court may determine that certain assets of yours should be taken for the benefit of the creditors, or that you have the ability to make monthly payments on some of the debt. But that is part of the process, and you shouldn’t try to hide assets or income, because you could be in a lot of trouble if they are later discovered.
7. Fully report your future income – The bankruptcy court will ask you to disclose all income you anticipate receiving in the near future. Be sure to include any wages, consulting income, tax refunds, accounts receivable, gifts, inheritances or other income you expect to be receiving.
8. Double check everything – Go over all of the bankruptcy schedules after they are filled out to ensure that everything is included, and the dollar figures attached to them are accurate. Check the math on the schedules to ensure accuracy.
9. Tell the court about errors – After you file for bankruptcy, if you determine that an error was made or items were not disclosed in error, report these to the court immediately. By reporting the information yourself, the court may look upon you more favorably than if the bankruptcy trustee discovers the information and tells the court you were untruthful.

Bankruptcy fraud is serious. Not only may you be on the hook for your debts for the rest of your life, you run the risk of criminal charges if you are caught lying. Follow the bankruptcy laws carefully, and you can avoid these complications.