Bankruptcy Fraud: What Dr. Phil’s Chapter 7 Case Teaches Every Debtor

The recent court-ordered conversion of Dr. Phil McGraw’s (“Dr. Phil”) Merit Street Media from Chapter 11 reorganization to a  Chapter 7 liquidation is a corporate scandal, but it holds a simple, chilling lesson for every individual debtor: Bankruptcy fraud is taken very seriously.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways

• Be Honest: Any attempt to deceive the court, whether by lying, deleting documents, or hiding assets, is an act of bad faith that can result in criminal prosecution.
• The Cost of Concealment: Trying to hide a small asset (like a tax refund or undisclosed bank funds) carries the same potential penalty as Dr. Phil’s corporate maneuvers: denial of discharge, meaning your debts will not be wiped out.
• Your Best Defense: Always be honest with your bankruptcy attorney. Lying is never worth the risk.

The bankruptcy judge’s ruling was a sharp rebuke, citing deleted text messages and a lack of candor, evidence of an alleged scheme to pay favored creditors. In bankruptcy, one creditor can’t be favored over another. It’s a common request from clients that state they wish to keep a certain credit card because of the benefits, but I have to remind them that all the creditors will be listed. You CAN’T pick and choose which creditors are wiped out in bankruptcy.

Understanding Non-Dischargeable Debts in Bankruptcy

In the eyes of the court regarding Dr. Phil’s case, this wasn’t an honest failure; it was an attempt to misuse the system.

Bankruptcy Fraud: Don’t Lie to the Trustee

I am reminded of a colleague, a Chapter 7 bankruptcy trustee, who had a unique way of starting his § 341 meetings:

He would hang laminated posters of the federal fraud statutes on the wall and begin his introduction by recounting a specific fraud case he handled. His story always ended the same way: the debtor was prosecuted and sent to jail.

This wasn’t a tactic to intimidate debtors. It was a statement of fact: bankruptcy fraud WILL NOT be tolerated.

While the details of Dr. Phil’s corporate case, with even alleged “gangster moves” and a failure to protect employees, read like a mafia novel, the fundamental legal principle is the same one that lands the average consumer in hot water: Bad faith is a ticket to a world of pain. Lying on your bankruptcy petition is never worth it!

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.