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Hiding assets in a bankruptcy can land you in prison

You and your spouse worked hard to open your small business. Maybe it was even a garage start-up that you grew into a viable company over the years. It's more than just another asset. It's almost like another child, something you created and nurtured.

But you have a debt mountain that accrued in the lean years when you lived off your plastic and lines of credit. You invested everything into the business, and it paid off. But now, you're afraid that your personal financial state could jeopardize your business.

Will I lose everything? 

You worry about losing all of your assets if you file for bankruptcy. You worked so hard for what you have. Maybe you could fail to mention your houseboat docked on Lake Cumberland or the Warhol you inherited and have hanging on your office wall. No one would find out, right?

Wrong. Bankruptcy trustees have seen every trick in the book to conceal assets and sources of wealth. Computerized records and other transfers of ownership make it unlikely that you could hide any assets of significant value from the court without getting caught.

You could wind up in prison

Filing for bankruptcy requires the debtor to sign, under oath and penalty of perjury, that everything you presented to the court is, to the best of your knowledge, true and correct.

That means all of your debts, property and assets must be disclosed in the bankruptcy petition. If you run afoul of this by attempting to hide assets and get caught, you will most likely spend time in a federal prison.

How would the trustee find out?

Bankruptcy courts grant trustees a lot of leeway when it comes to ferreting out assets that can be sold to pay off creditors. If they have reason to believe that you are not being forthcoming with the court, they can show up at your place of business and even your home to check for hidden assets. They can certainly compare your name and Social Security or EIN number against databases that record property transfers in the event of a shadow transaction between you and a relative or friend.

Sometimes it's a disgruntled former employee or ex with an ax to grind who drops a dime to the court that you still own that houseboat or painting. The bottom line is that you want to be honest and forthright in your dealings with the court. Plus, most (if not all) of the most common assets that people own can be protected under applicable exemption laws.

Other problems with lying

Getting caught hiding assets can jeopardize the bankruptcy discharge from being approved by the court. Then the trustee seizes and sells your property and distributes the proceeds to your creditors.

The difference now is that while you lose everything, there is no discharge of debt. Any balances owed to creditors can still be pursued (and likely will be).

Learn about all of your options to determine the best financial path forward for you and your small business.

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