What happens if the trustee or a creditor suspects that you're being less-than-honest about your financial situation? Your right to bankruptcy relief can be put in jeopardy, and you could actually end up facing criminal charges.
Section 727 of the bankruptcy code allows the bankruptcy trustee or a creditor to challenge your right to debt relief. A few specific situations are likely to cause suspicion to fall your way:
-- Property that was transferred out of your name and into someone else's within a certain period of time before you filed bankruptcy.
-- Allegations from a creditor that you lied about your income or debts on an application in order to get a credit card, auto or personal loan.
-- Property or money that's missing and for which you can't offer a satisfactory or clear explanation.
-- Evidence that your expenses are exceeding your income (such as pictures of you on Facebook enjoying a Disney vacation when you're supposed to be barely getting by).
If the trustee (or a creditor) is suspicious, he or she can ask for a 2004 Exam, which is widely regarded as a fishing expedition designed to try to figure out what you're hiding and where you're hiding it. The trustee has the power to subpoena anybody who might have knowledge about your financial situation — including relatives, business partners and close friends. That means that your parents, siblings, adult children and professional associates could all be called into court to testify, under oath, about whether or not you have hidden any income or assets (and whether or not they've helped you).
If the trustee ultimately decides that you intentionally hid assets or income, your bankruptcy will be given a Section 727 denial. Your non-exempt assets will be seized and sold to pay whatever debts they'll cover. Your creditors can then try to collect whatever else you still owe them through things like liens and wage garnishments.
Most personal bankruptcy cases sail through the court system without a problem, because most people who file for bankruptcy are honestly just trying to recover from a rough patch in their lives. To avoid the possibility of a 2004 exam and a Section 727 denial, be honest with your attorney about your entire financial situation — especially if an issue could cause a potential problem. Your attorney can advise you on the best way to avoid trouble.
Source: Findlaw, "11 U.S.C. 727: US Code - Section 727: Discharge," accessed Dec. 05, 2016