When your small business files for bankruptcy, you're making a promise to the federal government that you will follow the law - so your creditors will receive some amount of payment for what you owe. When you break that promise at any stage of the process, you commit fraud - jeopardizing your bankruptcy and exposing you to significant penalties. Fraud can make a bad bankruptcy experience many times worse.
Bankruptcy Fraud Investigation
When your business applies for loans, everything you tell the lender must be truthful. It is fraud to accept money or goods under false pretenses. An example would be if you submitted a "creative" tax return that misrepresents your business earnings. Before your business files for bankruptcy, have a lawyer look over your company's books for the months leading up to your financial difficulties. A lawyer can tell you if your books will stand up to inspection by the court and your creditors.
Bankruptcy Fraud Cases
It's easy to make innocent mistakes if you don't understand bankruptcy law. There are restrictions on what your business can and what it cannot do in the months before you file. For example, you cannot pay one creditor in February and file for bankruptcy in April to deal with all your other creditors. Any payments made within three months of filing can get your business into trouble. Additionally, you can't transfer ownership of any of your company's equipment or assets in the year before you file.
Always Act in "Good Faith"
"Good faith" means that you're dealing honestly with your creditors and with the bankruptcy court. Violating this code during the course of your bankruptcy can get you into trouble. Filing a petition for bankruptcy just to avoid your creditors and to stall for time to pay them isn't acting in good faith. Making a deal with one creditor, promising payment or a favor if that creditor does not object to your bankruptcy plan, isn't acting in good faith. All your dealings before and after you file for bankruptcy must be straightforward, responsible, and honest.
Bankruptcy Fraud Penalties
If your business commits fraud, the court will most likely dismiss your bankruptcy petition, leaving you with a lot of debt and no way to pay or eliminate it. In the worst-case scenario, you could face jail time. Consult with an attorney before you file to make sure your business practices can't be interpreted as fraudulent.
A Business Bankruptcy Lawyer Can Help
The law surrounding business bankruptcy is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a bankruptcy lawyer.