by Laura Egerman Esq.
Small business owners juggle many responsibilities, but the shouldn’t let record keeping fall by the wayside. Accurate financial records may be the most valuable business assets a businessperson has. Keeping your records up-to-date, accurate, and complete can sharply impact a business entrepreneur’s personal finances and business viability.
First, it should be noted that it is imperative that business and personal finances are kept separately. In the event of litigation, one’s inability to separate one’s finances creates the impression that they are one and the same. One could be held personally liable for business debts if you cannot demonstrate that it is a distinct entity.
In the context of a Chapter 7 bankruptcy, a court can deny discharge to a debtor where there are inaccurate and/or incomplete financial records. The Bankruptcy Code provides:
The court shall grant the debtor a discharge, unless … the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information including books, documents, records and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case. 
A debtor has an obligation to present its financial records at the time the Chapter 7 petition is filed. While form is not as important as substance, it is imperative that the records allow both the Trustee and creditors to determine the debtor’s financial condition and the cause of the debtor’s financial difficulty. Either the Trustee or a creditor can challenge a debtor’s discharge. For an objection to discharge to succeed, the challenging party must show not only that the debtor failed to maintain adequate records but also that, as a result, it is impossible to determine the debtor’s financial condition or material business transactions. “The test is whether ‘there is available written evidence made and preserved from which the present financial condition of the bankrupt and his business transactions for a reasonable period in the past may be ascertained.” Meridian Bank v. Alten , 958 F.2d 1226, 1230 (3d. Cir. 1992), quoting In re. Decker, 595 F.2d 187, 187 (3d. Cir. 1979).
In considering a challenge to discharge based on failure to maintain accurate records, the court will look at these six factors identified in the Atlen case to determine whether a failure to keep or maintain accurate records is justified: debtor’s level of education; sophistication of debtor’s business endeavors; volume of debtor’s business; the complexity of debtor’s business; the amount of credit extended to the debtor; and any other circumstances that the court deems appropriate.
In a recent decision, a debtor was denied a Chapter 7 discharge by a New Jersey bankruptcy court because his egregious failure to maintain records rendered it impossible for the court to determine his actual financial condition. In reviewing the factors identified in Alten, Judge Stern concluded that discharge was not warranted where the debtor, a well educated and highly sophisticated business man, was unable to provide financial documentation and records to substantiate any of his business practices. Stanziale v. Boyajian (In re. Boyajian), Bankr. Ct., D. NJ (2013).
The debtor owned, operated and/or oversaw more than 22 businesses, including law firms, debt collection agencies, and real estate holding companies. Although he listed no non-exempt assets on his Chapter 7 bankruptcy petition, he listed more than $39,000,000 in business and personal debt from which he sought to be discharged. Debtor had not filed federal tax returns for his business for at least four years prior to the filing, despite the fact that he had control over many companies and substantial sums of money. As a fiduciary for these many businesses, the debtor was under an obligation to file timely tax returns.
Each of these practices was a “red flag” to the trustee who then attempted further inquiry into debtor’s practices. The debtor had not maintained a personal bank account in more than five years, and was also delinquent in filing his personal tax returns. The accountant retained post-petition found the debtor’s books and records to be in shambles and personal and business records were virtually indistinguishable. Though the debtor produced more than 24,000 pages of financial documents post-petition, these documents were found by the accountant to be virtually worthless.
While the scope of the debtor’s business dealings was more complex than those of the typical small business owner, the case serves to emphasize the importance of maintaining accurate financial records from the outset. Trying to recreate financial books and records after the fact can result in personal liability for business debts or the denial of a discharge in bankruptcy. The extra time taken now to organize and maintain accurate financial records could have long lasting benefits for a business entrepreneur.
Laura M. Egerman is an associate and member of Stark & Stark’s Bankruptcy & Creditor’s Rights Group.