By Kitty J. Lin

What happens when you filed your bankruptcy petition with incorrect information? Mistakes happen all the time. No one is perfect. Does that mean you get to amend your petition to include the correct information?

According to the Federal Rules of Bankruptcy Procedure Rule 1009(a), “a voluntary petition, list, schedule, or statement may be amended by the Debtor as a matter of course at any time before the case is closed.” The bankruptcy courts want to provide the honest consumer who is unable to repay his or her debts with the opportunity to obtain a fresh start. For the dishonest consumer the rules are not as lenient. The Federal Rules of Bankruptcy Procedure Rule 4003(b) states that a party in interest or the trustee may object to the amendments if they believe that the amendments are incorrectly applied or used. The bankruptcy courts have also ruled that a judge could disallow certain exemptions if there was bad faith by the debtor (person claiming the exemptions) or prejudice to creditors. See Martinson v. Michael (In re Michael), 163 F.3d. 526, 529 (9th Cir. 1998).

So what is considered bad faith? Generally, this question is answered based on the totality of circumstances. There can be many instances of bad faith. One of the most common examples of bad faith is when the person amending their petition tried to hide assets and only amended their schedules to reflect the true value when it was beneficial to them or when they are found out or are in danger of being found out by the trustee or creditor. Bad faith can be found even if the person amending their petition disclosed the asset but misrepresented the value or undervalued the asset. If bad faith is found the right to amend the petition to claim an exemption could be lost. If you need to make a change in your bankruptcy petition is best to let your bankruptcy lawyer know as soon as possible.

What about prejudice to creditors? The court in Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir. 1983) states, “simple delay in filing an amendment….does not alone prejudice creditors. Nor does prejudice to creditors occur merely because a claimed exemption, if held timely, would be granted.” The court in In Re Arnold, 252 B.R. 778 (B.A.P. 9th Cir., 2000) lays out some instances of what is considered prejudice to creditors. “Prejudice to creditors is clearly present where they suffer an actual economic loss due to a debtor’s delay in claiming his exemption.” See Grzesnikowski v. Shaffer (In re Shaffer), 92 B.R. 632, 635 (Bankr.E.D.Pa. 1988). This was considered prejudice to creditors because the creditor would have acted differently if they knew the exemptions would be amended. In another case, In re Bowman, 1996 WL529233 (Bankr.D.Md. 1996), the court found there was prejudice to creditors because “substantial judicial resources were devoted to resolving issues that would not have required resolution if the debtor had promptly claimed the exemption.”

Needless to say, it is very important to make sure your petition and schedules are accurately listed to avoid losing your assets to creditors. It would be wise to consult with a bankruptcy attorney before filing your petition to ensure that all your assets are listed properly and therefore eligible to be protected by properly applied exemptions.