First Circuit Court of Appeals Upholds Denial of Discharge Based on Failure to Keep Records If you're considering filing for bankruptcy, make sure

First Circuit Court of Appeals Upholds Denial of Discharge Based on Failure to Keep Records If you're considering filing for bankruptcy, make sure

that you have financial records which allow for an adequate evaluation of your financial situation. Without them, bankruptcy might not be worth

pursuing. To be sure, the relevant statute excuses a failure to keep adequate financial records when “such […] failure […] was justified under all of the circumstances of the case.” However, the First Circuit’s latest bankruptcy-related case illustrates how difficult it is for a debtor to avail itself of such escape hatch.

In that case, a judgment creditor sought a denial of the debtor’s discharge based on the debtor’s failure to keep records after a house fire. The debtor’s failure to keep records was not seriously disputed.

Rather, the debtor argued that (1) the post-hoc rent rolls he created for the Trustee fulfilled his duty to keep records, and (2) his practice of not keeping records was justified under the circumstances. Both arguments missed the mark.

The post-hoc rent rolls were insufficient because they were merely the debtor’s “best recollection” and, in any event, failed to reconcile the difference between estimated rent received and bank deposits.

The debtor argued that his failure to keep records was justified because “such records are customarily not used with few rental units,” and his family was going through extenuating circumstances after being displaced by the fire.

In this context, the First Circuit explained that the justification defense is one of objective reasonableness. As such, courts ask what “a reasonably prudent person” would do in like circumstances.

The court of appeals concluded that reasonable individual who owned several income- producing properties would keep and preserve records related to those properties. In fact, the court noted that the debtor had, in the past kept adequate financial records, which supported the finding that it was unreasonable for the debtor to have stopped doing so.

As a last-ditch effort, the debtor argued that a denial of discharge would punish him for operating on a cash basis. The First Circuit found this argument misguided, as it was not the cash basis that doomed his discharge. Rather, it was his failure to adequately record and account for the flow of that cash in a way that makes it possible for someone to ascertain his financial status that did so.