Family Businesses in Financial Stress: Acts of Desperation and Bankruptcy

By Donald L. Swanson

Desperate people do desperate things. And desperation leads even good people astray.

So it is in the world of financial stress.  Desperate people do desperate things: like providing sloppy financial statements to creditors, failing to assure that all collateral proceeds go to the proper place, and fudging on the truth here-and-there.

All of such desperate acts can lead to problems in a subsequent bankruptcy. One such problem can be non-dischargeability under sections 523 or 727 of the Bankruptcy Code. Another can be denial of plan confirmation for lack of good faith, under sections 1129(a)(3), 1225(a)(3) or 1325(a)(3) of the Bankruptcy Code.

Even bigger problems can arise when bankruptcy debtors fail to disclose their desperate acts to their own bankruptcy attorneys. The Bankruptcy Code requires broad disclosures by a debtor of financial information—under oath and penalty of perjury. When a debtor’s attorney knows all the facts, the attorney can act to protect the debtor in and through such disclosures—or maybe even avoid a bankruptcy filing altogether, if necessary.

But major problems can arise when a debtor’s attorney prepares disclosure documents in bankruptcy, without full knowledge of the desperate acts. The attorney can end up finding out about such problems the hard way—when it’s too late to protect the debtor. And things go downhill from there.

I know how this works. I’ve lived it. It’s tough.

And so, I turn down potential clients when their story doesn’t seem to quite add up. It’s not that I won’t represent someone who did something wrong: everyone makes mistakes, and we can usually work with and around the desperate acts that good people have done.

It’s the potential client who won’t come clean that creates the problem.

On the other hand, I love representing good people in bankruptcy. These are they who, despite best efforts, are being swept away in a flood of debt and in desperate need of help. If I can provide that help . . . I love doing so—desperate acts and all!

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