What is bankruptcy fraud?
UPDATED: June 19, 2018
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Bankruptcy fraud is a federal crime that occurs when a person knowingly and fraudulently commits certain prohibited acts in connection with their bankruptcy case. According to the United States Department of Justice, bankruptcy fraud occurs in approximately ten percent of all bankruptcy filings. The United States Trustee is responsible for investigating cases of bankruptcy fraud and the Department of Justice is responsible for prosecuting those who commit bankruptcy fraud. If convicted, a person may be fined up to $250,000 and/or imprisoned for up to five years in a federal prison.
Proving Fraud Took Place
In order to convict a person of bankruptcy fraud, it must be proven that the individual intended to commit the crime. There must be an actual intent to deceive, which requires evidence that there was planning involved. If a person makes a mistake or forgets to include an asset when preparing the bankruptcy documents, this would not constitute bankruptcy fraud because intent is a necessary element of the crime.
Concealment of Assets
The most common type of bankruptcy fraud is concealment of assets whereby a debtor hides assets from the bankruptcy trustee so that the trustee cannot liquidate those assets to pay creditors. Concealment of assets involves transferring assets to a friend or family member, or, failing to disclose certain assets or income in the bankruptcy documents.
For example, in one case, a debtor was charged with concealing assets when she transferred a $60,000 workers’ compensation settlement payment to a bank account under another name and failed to disclose the payment in her bankruptcy filing. Concealment of assets accounts for over 70% of all bankruptcy fraud.
Another method of committing bankruptcy fraud is by making false statements, either in person during a bankruptcy proceeding, or in sworn documents. When a person files for bankruptcy protection, they are required to fill out a petition and complete numerous supporting documents, including a statement of their financial affairs and a schedule of income and assets. If the debtor intentionally makes a false statement in the documents, he or she may be prosecuted.
For example, in one case, a debtor was convicted of bankruptcy fraud when he falsely reported on his bankruptcy petition that he had no financial accounts in his name that had been closed in the year before he filed his petition. In fact, he had closed seven bank accounts in the prior year. The debtor was sentenced to 4 years in federal prison, 3 years on supervised release, and was fined $10,000.
Nevertheless, some bankruptcy courts have held that the misrepresentation must be material, meaning that the false statement must be capable of influencing the outcome of the bankruptcy proceeding.
This issue arose in a similar case where a debtor failed to disclose two bank accounts that were closed the previous year. One account had a balance of $51 and the other account had a balance of $87. Although the debtor claimed at trial that he simply forgot about the old accounts, a jury convicted him of bankruptcy fraud for making a false declaration. However, the presiding judge overturned the conviction stating that the failure to disclose must be material, and because the debtor’s liabilities exceeded his assets by over $1 million, the two small bank accounts would not have had a significant impact on the filing.
A person may also commit bankruptcy fraud by filing multiple bankruptcy claims in two or more states, using the same name and information, a false name and information, or a combination of both. In this case, a debtor generally lists the same assets on each fraudulent claim, but intentionally fails to include every asset. This confuses the system and slows down the court’s ability to process the bankruptcy filings. The purpose is to fraudulently protect assets from total liquidation by giving the debtor time to conceal his or her assets.
Bankruptcy Petition Mills
A bankruptcy petition mill is a bankruptcy fraud scheme that is committed by a third party. In this scenario, the perpetrator claims to be a consultant who can help a tenant avoid eviction. The “consultant” collects all of the tenant’s financial information and, unknown to the tenant, files a bankruptcy petition. While the case is pending, the perpetrator charges the tenant fees, drains the tenant’s bank accounts, and destroys the tenant’s credit. This type of bankruptcy fraud is reportedly on the rise in the United States and often targets non-English speaking victims.
For information about the penalties involved with bankruptcy fraud, refer to the FreeAdvice article What Are the Possible Penalties for Bankruptcy Fraud.