Lying in bankruptcy: it’s the whether, not the why

In re Katsman (Skavysh v. Katsman), No. 13-1881 (7th Cir. Nov. 19, 2014).

If you file for bankruptcy and lie to the court, the court must deny you a “discharge.” That is, the court must refuse to wipe out your debts—which, of course, is the whole point of filing for bankruptcy. So there is a high price to pay for not telling the truth, as Sofia Katsman learned in this case.

While Katsman was going through an acrimonious divorce, four people lent her money for food, shelter, and legal expenses. Katsman later filed for bankruptcy, but didn’t disclose these creditors to the bankruptcy court, as she was required to do. One of the four creditors, who also happened to be the son of Katsman’s ex-husband, asked the court to deny her a discharge of her debts. 

Katsman testified that she hadn’t listed these debts on her bankruptcy petition precisely because she hoped to repay them: “I couldn’t include them” on the petition and then “never pay them,” she testified. The Seventh Circuit points out that this isn’t a reason for not listing the debts. After her debts were discharged, she could pay anybody anything she wished. 

The bankruptcy court, however, said that it couldn’t deny Katsman a discharge. It reasoned that, because she planned to repay the creditors whom she hadn’t disclosed, she hadn’t concealed them for pecuniary gain. 

The Seventh Circuit disagrees. The test is whether Katsman intended to deceive the bankruptcy court, not why. Because Katsman intended to deceive, her debts cannot be wiped clean.