Legal Definitions - statement of financial affairs

A statement of financial affairs is a mandatory legal document that individuals or businesses must file when they declare bankruptcy. Its purpose is to provide a comprehensive and detailed overview of the debtor's financial history and current status to the bankruptcy court, the trustee overseeing the case, and creditors. This document requires the debtor to answer a series of questions about their assets, liabilities, income, expenses, significant financial transactions, and any prior bankruptcy filings, offering a complete picture of their financial situation leading up to and at the time of bankruptcy.

Here are some examples illustrating the application of a statement of financial affairs:

• Individual Bankruptcy: Imagine a person named Emily who has accumulated substantial medical debt and credit card balances, leading her to file for Chapter 7 bankruptcy. As part of this process, Emily must complete a statement of financial affairs. This document will require her to disclose details such as all her bank accounts, any real estate or vehicles she owns, her sources of income, any significant gifts she has given or received in recent years, payments made to creditors shortly before filing, and information about any previous bankruptcy cases. This comprehensive disclosure helps the bankruptcy trustee identify all of Emily's assets and understand her financial activities to ensure a fair and orderly distribution to her creditors.

• Small Business Reorganization: Consider "The Daily Grind," a small coffee shop struggling with declining sales and mounting supplier debt. The owners decide to file for Chapter 11 bankruptcy to reorganize the business and develop a repayment plan. The corporation must submit a statement of financial affairs. This document will detail the business's corporate bank accounts, inventory, equipment, outstanding loans, recent payments made to suppliers or employees, any pending lawsuits against the business, and information about its financial transactions and operations over the past several years. This information is crucial for the court and creditors to assess the business's viability and approve a reorganization plan.

• Complex Personal Finances: Suppose David, a self-employed consultant with various investments and a mortgage, faces a sudden loss of major clients and decides to file for Chapter 13 bankruptcy to manage his debts while retaining his home. His statement of financial affairs will be extensive. It will require him to list not only his personal bank accounts, investment portfolios, and real estate but also details about his consulting business's finances, including business accounts, significant contracts, recent transfers of funds between his personal and business accounts, and any business-related debts or assets. This detailed disclosure ensures that all aspects of his financial life are transparent, allowing the court to approve a realistic repayment plan that considers both his personal and professional financial obligations.