An unfortunate fact of life is that where there is money, fraud often follows. Bankruptcy cases are no different. If you ever find yourself involved in a bankruptcy matter, be careful to avoid even the appearance of dishonesty, and watch out for the possibility that somebody in the case has committed fraud. The line between innocent mistakes and intentional deception is sometimes surprisingly thin, at least in the eyes of others observing your actions. In this article, you’ll learn how to recognize, avoid, and report bankruptcy fraud.
What Is Bankruptcy Fraud?
Bankruptcy fraud is a federal crime, and judges and prosecutors take it seriously. Government watchdog agencies don’t have the budgets to review every case, so to deter fraud, the penalties are severe. Bankruptcy fraud is a felony that can result in fines up to $250,000 and imprisonment for up to twenty years.
To prove bankruptcy fraud, the government must show that the defendant intentionally misrepresented an important fact in the case, with the intent to deceive someone else involved. Of course, nobody admits that they intended to commit fraud, so it’s typically proven by actions, like moving money in a suspicious way or filing documents containing contradictory information with the court. Also, fraud can exist when you don’t act as you should, such as by failing to disclose to the court or a trustee that you won a lottery prize, or allowing your creditors to rely on facts that you know are false.
For the most part, bankruptcy fraud is an act or failure to act that happens during the bankruptcy case, but sometimes it’s part of a scheme. For instance, a “bust-out” scheme is when somebody acquires a business, quietly sells off the assets without using the proceeds to pay creditors, and then files a bankruptcy without disclosing the sale of assets.
Types of Bankruptcy Fraud
Bankruptcy fraud comes in four basic forms:
concealment of property
giving false information
filing multiple bankruptcy cases, and
Concealment is by far the most common type of bankruptcy fraud. It typically happens when a bankruptcy filer hides valuable assets and fails to list the hidden property in the bankruptcy schedules (the official court papers that you must file to start your bankruptcy).
Examples of fraudulent concealment would include:
hiding expensive jewelry or artwork with friends or family
placing cash or property in undisclosed safe deposit boxes, or
keeping assets at home without telling anybody that they exist.
(Find out what property you’re allowed to keep in How to Find Your State Bankruptcy Exemptions.)
False information usually comes in the form of giving misleading or incomplete information about yourself, your property, or your debts. Everyone who files a bankruptcy case must list income, assets, and liabilities in the proper schedule—and the information must be complete and accurate to a fault. For example, filing a bankruptcy under a false name or social security number to conceal misconduct would constitute fraud.
Multiple bankruptcy filings can be fraudulent if you file them with the goal of deceiving creditors about your identity or assets. All consecutive filings aren’t fraudulent, however—sometimes there can be good reasons to file more than one case. But when someone files cases in multiple states to confuse the court and creditors, or repeatedly files and dismisses bankruptcy cases to avoid a home foreclosure, that person could be found to have committed fraud.
However, bankruptcy filers aren’t the only process participants that can commit fraud. Bankruptcy trustees, usually private attorneys or accountants appointed in Chapter 7 cases, sometimes abuse their positions by taking money from a sale of property for personal use or accepting a bribe from a bankruptcy filer to look the other way when that person hides an asset.
How to Avoid Bankruptcy Fraud
Disclose, disclose, disclose. The bankruptcy process depends on full and accurate disclosure by all participants to run properly. As long as you tell everyone in the case exactly what assets you own, what debts you owe, and what recent transactions you have engaged in, you shouldn’t have a problem.
Here are a few tips:
You are in charge of what you report to the court—don’t forget that accuracy matters.
Carefully review all of the information on your bankruptcy petition before you sign it.
Remember that attorneys can make mistakes—check their work.
Circumvent potential problems by explaining anything that you think the trustee or court might question or misunderstand.
Of course, people make honest mistakes all the time. If that happens to you, promptly admit any error; apologize to the court, the trustee and any other affected persons; and, make the necessary correction.
How to Report Bankruptcy Fraud
If you think somebody in a bankruptcy case has committed fraud, report it immediately, especially if there is a chance someone might accuse you of participating in it. The U.S. Trustee is responsible for finding bankruptcy fraud and will get the information into the hands of the right enforcement agency (for example, the U.S. Attorney, the Securities and Exchange Commission, or the Internal Revenue Service). You can visit the U.S. Trustee’s website, contact a local office, or mail your concern to the Executive Office of the U.S. Trustee, Criminal Enforcement Unit, 441 G Street NW, Suite 6150, Washington, DC 20530.
Questions for Your Attorney
How detailed should I be when listing my debts and property?
How can I correct a mistake on my bankruptcy forms?
If a family member owes me money, do I have to report it in my bankruptcy case?