Bankruptcy Schedules for a Business: 7 Mistakes That Trigger a Dismissal or a Fraud Referral

When a business files for bankruptcy protection, it has to be very careful in complying with all the schedules and reporting rules. These are seven mistakes to avoid:

• filing schedules late,
• leaving out required documents,
• ignoring U.S. trustee requests and meetings,
• missing monthly reports and fees,
• hiding or understating assets,
• signing false statements under oath,
• and ignoring a motion to dismiss.

Late or missing paperwork can get the case dismissed or converted to a Chapter 7 liquidation. Hiding assets or lying about debts can get reported to the prosecutors.

By filing a Chapter 11, your business will usually stay in control as the debtor in possession, but now in a fiduciary role. Your company’s schedules, monthly reports and the U.S. trustee’s oversight are the price you pay for keeping the keys.

Schedules and Reports the Court Requires

If a business doesn’t file its required schedules with the initial bankruptcy petition, it has 14 days to file them. When the petition goes to the court, the process of getting the schedules done must begin immediately. It can take weeks to gather documents, look for assets, and review every debt owed. Even though an extension can be granted to file the schedules and other information, it is better to plan for the schedules to be filed by the deadline. The court can extend the deadline for filing schedules on a showing of cause, on notice to the U.S. trustee. There may be an additional requirement, though, for debtors filing as small businesses and seeking an extension beyond 30 days after the order for relief. A failure to comply with this deadline, or to obtain an extension, could result in the case being dismissed or converted to Chapter 7.

The required documents in a bankruptcy filing go beyond just the petition: the filing should include

• a list of creditors,
• a schedule of assets and liabilities,
• a schedule of income and expenses,
• a list of executory contracts and unexpired leases,
• and a statement of its financial affairs.

Small businesses are also required to attach the latest balance sheet, statement of operations, cash-flow statement, and the most recent federal tax return, or a sworn statement that none of these exist. If the debtor does not file these documents and schedules as required, the trustee can file a motion to dismiss the case, or convert it to a Chapter 7. An honest and full accounting will protect the business from having to amend the schedules and deal with any accusations of hiding assets or fraud.

While the business works on these filings, its case is supervised by the office of the United States trustee. The U.S. trustee also conducts the meeting of the creditors to verify the financial condition of the business and to ensure the truthfulness of the financial statements. A small business bankruptcy is subject to even tighter deadlines and reporting requirements than an ordinary Chapter 11. In addition to regular reporting, the debtor must meet with the U.S. trustee early in the case to review its viability and business plan, and senior management and counsel must attend. If the debtor in possession does not appear at the meeting, the U.S. trustee could file a motion to dismiss the case or convert it to Chapter 7. If the debtor doesn’t give requested documents, they risk dismissal or conversion of the case.

The debtor in a Chapter 11 case is required to file a monthly report of income and expenses, and to pay a quarterly fee based on the disbursements made by the debtor. These fees must be paid, and missing them could cause the case to be dismissed or converted to a Chapter 7. If a debtor doesn’t file the monthly operating reports, the U.S. trustee or a creditor can move to dismiss or convert the case to Chapter 7. The U.S. trustee also requires you to set up new bank accounts, and to pay any taxes that come due after you file. Missing post-petition tax filings or returns are grounds for dismissal.

Biggest Mistakes a Business Can Make in Bankruptcy

Hiding or understating assets: It goes without saying that hiding or understating the value of assets is one of the biggest mistakes a business can make in bankruptcy. This mistake is especially disastrous, because it can get reported to a U.S. Attorney for criminal prosecution. Knowingly and fraudulently concealing assets is a federal crime, subject to up to five years in prison. The company can also be fined, up to $500,000 or twice the loss or gain from the fraud.

False statements under oath: People who sign bankruptcy schedules under penalty of perjury should never forget that false oath or declaration, made knowingly and fraudulently, is a federal crime. It can carry up to five years in prison. If the business owner is personally filing, he or she can be denied a discharge if they file a false oath or fail to maintain business records. When a judge or trustee has reasonable grounds to suspect a bankruptcy crime, they must report it to the U.S. Attorney for investigation. If management participated in the fraud, the U.S. trustee will seek a trustee to take over the business.

Ignoring a motion to dismiss: If your company is served with a motion to dismiss its Chapter 11 case, it must be addressed and not ignored. An unexcused missed filing is usually enough to dismiss or convert the case. The court will generally begin a hearing within 30 days, and if there is cause, it will usually dismiss or convert the case. If a corporation ends up in Chapter 7, it will get no discharge of its debts.

Avoid Making Mistakes

The very best way to avoid making mistakes is to assume that every schedule you file will be checked closely. Treat every schedule as a sworn statement: you could be criminally prosecuted if it is false. Ask for an extension of time before the deadline, not after it, or your case may be dismissed. Answer questions or requests from the trustee quickly and in full detail. Keep careful records of the documents you filed and any updates you made.