When you file for Chapter 7 or Chapter 13 bankruptcy, you must complete and file a number of forms, called the official bankruptcy forms. On one of those forms, the Statement of Financial Affairs for Individuals Filing for Bankruptcy, you tell the court about your financial situation for ten years prior to filing. The information you give allows the trustee to look for certain old transactions, which the trustee will unwind (cancel) for the benefit of your creditors.
(To learn about the other forms you must file, see Completing the Bankruptcy Forms.)
You probably spent a lot of effort trying to fix your shaky financial situation before deciding to file for bankruptcy. For example, it’s not uncommon to sell a car to pay pressing bills, or to cash-in stock to make ends meet. And understandably, you may have been more inclined to pay off a loan from your mother than a merchant’s debt. But ranking your creditors according to your own sense of right probably didn’t result in paying them according to the bankruptcy law, which requires that you treat all creditors equally, and not “favor one creditor over another.”
Don’t worry about negative consequences to you personally if you inadvertently “broke the law” by favoring one creditor over another. Most of the time, this doesn’t happen. The bankruptcy court will sort it out, as explained more fully just below.
The statement of financial affairs form helps trustees correct any unfairness suffered by your creditors as a result of your recent bill-paying or other transfers, by gathering information about what you did financially up to ten years before your bankruptcy—although the average “look back” period is two years. The trustee uses your answers to go back in time and undo transactions where appropriate. Even if this happens (which it rarely does), it’s unlikely to affect you. For example, you probably won’t care if the trustee demands the return of a previous credit card payment, as long as your credit card debt is wiped out.
However, revealing your recent payments and transactions could have unpleasant consequences if you accidentally ran afoul of certain bankruptcy laws. For example, many people don’t realize that a trustee can demand the return of insider payments made a year prior to filing, and that family members are considered insiders. Now consider that payment to your mother to satisfy her loan: This law allows the trustee to force your mother to return payments you made to repay it. Note that this is true only if the loan was an informal one, that is, the two of you didn’t execute a promissory note. To be safe, you might want have an attorney review your documents before filing bankruptcy.
You probably won’t find it shocking to learn that a small—but significant—minority of people intentionally hide property before filing for bankruptcy. While accidentally favoring one creditor over another won’t get you in hot water, intentionally defrauding your creditors will. In fact, doing so exposes you to civil and criminal prosecution.
Certain form questions help the trustee ferret out fraud, by asking, for example, about your property transfers. If the trustee discovers that you intentionally sold your car to your brother for less than its fair market value, you might find yourself in trouble—especially if your brother transfers the title back to you after you receive your bankruptcy discharge.
To learn more about what a trustee does with the information in this form, see How the Trustee Uses the Statement of Financial Affairs to Find Money for My Creditors. [LINK]
Each section of the statement of financial affairs asks questions about a particular area of your financial life. For example, you’ll list your banking and investment accounts in one section, and property transfers in another. Each section also has its own set of easy-to-understand instructions, so the form itself is self-explanatory.
To save time, you might want to gather your records together before filling it out. How far back you’ll go depends on the transaction type. For example, you’ll go back 90 days when reporting any payments you’ve made to creditors that exceed $600. (The trustee can—and likely will—ask creditors to return such payments.)
You’ll provide current information about:
You’ll provide last year’s information about:
You’ll provide two years’ worth of information about:
You’ll also report the following:
You must sign the statement of financial affairs under penalty of perjury, stating that all the information you have provided is true and correct. The form reminds you that the penalty for making a false statement is a fine of up to $250,000, imprisonment for up to 20 years, or both.
You can find the most recent version of the Statement of Financial Affairs on the U.S. Court’s website at www.uscourts.gov/forms/bankruptcy-forms. To learn more about getting the official forms, see The Bankruptcy Forms: Getting Started.
This article provides general information only. There are many legal issues involved and important decisions to be made when filing for bankruptcy. You must understand the entire bankruptcy process, learn about the applicable federal and state laws, and determine how those laws will affect your particular situation before you complete the bankruptcy forms. If you want to file bankruptcy without a lawyer, use a good do-it-yourself book like Nolo's How to File for Chapter 7 Bankruptcy to ensure you make well-informed decisions about your bankruptcy.