The word “bankruptcy” has such a negative connotation, and it is easy to forget that the process is intended to help those in tough financial situations. In other words, bankruptcy is not necessarily a “last resort” for individuals and businesses, and it instead may be a prudent choice in the face of unexpected financial challenges. The clearest reminder of this is the fact that, when not handled properly, bankruptcy petitions can be denied. The federal bankruptcy code has very clear substantive and procedural rules that must be followed. Failure to abide by those requirements may lead a judge to reject one’s attempt to declare bankruptcy.

A denial of petitions is perhaps most common with business bankruptcies. One of the most common reasons why a business bankruptcy is denied by the courts is because the company tries to hide assets from the trustees.

When a business files for bankruptcy, the owner is required to also provide what is referred to as 521 documentation. This includes bank statements, tax returns, profit and loss statements for the business. The trustee assigned to the bankruptcy will carefully compare all these documents to make sure that there are no discrepancies which would indicate the business owner is being less than truthful about the company’s debts and assets.

There are countless numbers of business bankruptcy cases that have been rejected by the court because the trustees suspected the owner was hiding money in their filings.

The liquidation process required in certain bankruptcies involves the sale of all nonexempt assets to partially pay creditors at least some of what they are owed. Consequently, trustees managing the bankruptcy must catalog all the assets owned. Sometimes owners may attempt to skirt the rules by hiding assets from trustees, hoping to avoid losing them in liquidation.  When that happens, and the court finds out about it, there are serious ramifications, including the denial of the bankruptcy petition.

It also means that the company and owner remain liable for all the debt they were trying to get discharged in their bankruptcy. It is hard to get a fresh start with that looming liability.

Business Bankruptcy Help

Small businesses in our area must seek out the help of a business bankruptcy lawyer, like a bankruptcy attorney if they are considering their long-term financial options. When not handled properly, even innocent mistakes can lead to a petition being denied, resulting in serious harm to businesses and their owners.