Jennifer McKinney (aka MckMama) and Israel McKinney appear to have settled all claims in their bankruptcy filing in which trustee Gene Doeling alleged fraud, saying:

The Debtors have concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtors’ financial condition or business transactions might be ascertained. The debtors failed to keep adequate books and records from which their financial transactions could be ascertained. The co-debtor was receiving cash payments from photography clients that were not disclosed and for which she has been unable to provide an accounting.

In a document filed yesterday in Bankruptcy Court, it appears the McKinneys and the trustee have come to a settlement in the case.  Jennifer and Israel McKinney have already agreed to a waiver of discharge, which means they must keep (and pay!) all their debts and the debts in the original bankruptcy filing can never be discharged through bankruptcy.

Now the McKinneys are agreeing to pay to the trustee (for the benefit of creditors) for the value of the non-exempt assets (the ones they lied about in the bankruptcy filing) in order to put this matter to rest.

The agreement reads as follows:

The trustee filed a complaint to deny discharge on May 24, 2012, alleging that the debtors had several undisclosed assets at the time of the bankruptcy filing. These included an undisclosed PayPal account, undisclosed receivables, an undisclosed travel trailer and undisclosed domain names.

The debtor Jennifer McKinney  contends that the PayPal was not set up by her, was not owned by her, and was never accessed by her. The undisclosed receivables amounted to $1,460. The camper was a 1950’s model that had a value of $750. The debtor has agreed to and does assign and transfer ownership of the domain names of mckmama.com” and “mycharmingkids.net” to the bankruptcy estate, and will assist the bankruptcy estate in obtaining title and ownership of these domain names so they can be liquidated by the bankruptcy estate. The debtors also have $1,624.70 of nonexempt equity in a 2005 GMC Yukon sport utility vehicle.

The trustee has agreed to accept the sum of $3,500 from the debtors for the value of the nonexempt assets, payable over three months beginning October 1, 2012 and continuing on the first of each month thereafter.

Both debtors have voluntarily waived their discharges in this bankruptcy case and the court entered an order waiving their discharges on October 10, 2012. Upon approval of this agreement, the trustee will dismiss the remaining claims in adversary proceeding 12-6024.

So what does this mean? The bankruptcy case and the related case filed by the trustee will be closed, so long as the judge accepts the settlement and MckMama pays the $3,500 she is agreeing to pay.

However, there’s a slight problem with this most recent filing. Those who have followed Jennifer McKinney know that in fact, she did have a PayPal account that she regularly used in her business. She used the PayPal account to receive payments for her photography business, as well as other things. In this blog post from September 2011, Jennifer directs people to sign up for photography classes and pay via PayPal (click to see full size):

Jennifer also admitted several times in the bankruptcy creditors meeting that she had a PayPal account she actively used:

TR:     How do you get paid by Amazon?

JM:     PayPal.

TR:     You get merchant credits?

JM:     I don’t know what that is.

TR:     So merchants put a credit on your account, like Amazon, for example. They give you a credit for deals that come through your site so that you have, let’s just say $100 of things you can buy at Amazon.

JM:     Oh. Maybe they offer it. I just take it as a straight up payment to PayPal.

And:

TR:     So you have the Burst income, you’ve got the Google AdSense, you have the media consultants, you have the PayPal account. You don’t list any of those things in your bankruptcy schedules, right?

JM:     I didn’t separate them out and I didn’t list as much as I had coming in, no.

TR:     Well you have a PayPal account, a bank account, with money in it, right?

JM:     Yes.

TR:     Money that you can put in and take out?

JM:     Right, but everything from the PayPal goes right to my bank account, so I didn’t list it because it’s not—it’s effectively just a door into my bank account. For the money on here I listed, it would have been from my bank account.

TR:     That’s not what the question asked. The question asked you to list all bank accounts, doesn’t it?

JM:     Yeah, I didn’t list my PayPal account. I didn’t think of it as a bank account. I’m sorry.

I do wish that Mr. Doeling had investigated this issue further, sending a subpoena to PayPal for all records on Jennifer and Israel McKinney.  Jennifer has publicly claimed that someone set up fake PayPal accounts in her name to frame her for bankruptcy fraud. Her blog post is but one small shred of evidence proving that Jennifer had a PayPal account of her own, and no amount of “framing” by anyone else could change that.

Does all of this mean that Jennifer and Israel McKinney will not be held to account for their lies to the bankruptcy court?

No. The trustee is getting what he wanted from the McKinneys. He is getting the value of the assets they didn’t disclose (less the PayPal account, which he is apparently leaving alone based on Jennifer’s false representation that she didn’t have a PayPal account). He has likely weighed the probability of winning at trial, and what would be recovered, and has decided that this makes the most sense to everyone. (i.e. Even with a trial, there may not be anything more that he could recover.)

This settlement does not mean that criminal charges could not be brought against the McKinneys for bankruptcy fraud. There is no telling whether or not this may happen. This decision is out of the hands of the trustee, and will be made by federal prosecutors. There is no way to know if the prosecutors are considering this case for criminal charges.

Also, Jennifer and Israel are still on the hook for all of the debts in the original filing. They must pay those, and can never have them discharged in bankruptcy.

And there is still the possibility of trouble with the Internal Revenue Services. The McKinneys owe tens of thousands of dollars in unpaid taxes, and they’re not going to get out of that. While there is a process called Offer In Compromise through which taxpayers can have their tax debts reduced, I doubt that the McKinneys would qualify for such a deal. They are young and have lots of time to earn money and pay what they owe. The IRS has no reason to cut them a deal…. especially when chances are good that the have a long history of improper reporting and underpaid taxes.

While many had hoped to see a greater consequence come out of the bankruptcy case, I believe this outcome is the best we could have hoped for. Mr. Doeling has settled the claims he can settle, and has done the best job he can of getting assets for the benefit of creditors. Any other action is out of his hands, although I hope he has referred the case to the federal prosecutor for further action.