The bankruptcy process assists individuals who cannot pay their debts to get a fresh start. They can discharge debts they cannot pay through Chapter 7 or Chapter 13. A bankruptcy discharge means that the person no longer has a legal obligation to repay the debt. The creditor cannot take any action to collect a discharged debt.
Most people who file for bankruptcy relief do so because of a financial crisis that was not within their control. Common reasons for filing bankruptcy include unemployment, illness, disability, divorce, accidental injury, and business failure.
However, bankruptcy relief is also available to individuals who overuse credit credits or make poor financial decisions. The bankruptcy court does not judge a debtor for why the debtor needs bankruptcy help.
Unfortunately, some individuals abuse the bankruptcy system. They intentionally try to defraud their creditors. Individuals who commit bankruptcy fraud can be charged with a crime and face severe penalties in federal court.
Bankruptcy fraud is a federal crime. It may also involve other crimes, such as identity theft, mortgage fraud, insurance fraud, and money laundering. In fact, the IRS has uncovered specific bankruptcy fraud cases. 18 U.S.C. §152 defines nine instances of bankruptcy fraud:
Any of the above acts could result in charges of bankruptcy fraud. A person could be charged with one or more of the above crimes. Additionally, they could be charged with other white-collar crimes in conjunction with bankruptcy fraud.
Many individuals we have spoken with do not understand all of the different options they have been considering bankruptcy. For example, you may see that Chapter 7 bankruptcy is the least expensive option, but you probably do not want to do bankruptcy fraud in the process.
As such, we built the following debt relief options calculator to help you compare: 1) Chapter 7 qualification and cost. 2) Chapter 13 payment plan 3) Debt Management 4) Debt Settlement and 5) Debt Payoff Planning. The free calculator should allow you to compare all of your options holistically to make the most informed decision.
If you consider filing a personal bankruptcy case under Chapter 7 or Chapter 13, you need to be aware of these facts about bankruptcy fraud.
The crime of hiding assets from the bankruptcy trustee, creditors, or bankruptcy court is the most common type of bankruptcy fraud. Three of the nine crimes listed above are related to the concealment of assets. Common types of bankruptcy fraud related to concealment of assets include, but are not limited to:
Bankruptcy trustees are incredibly skilled at locating assets that debtors try to hide. They have numerous resources to identify assets and transfers that a debtor failed to report on their bankruptcy schedules.
A party can report suspicions of bankruptcy fraud without actual evidence of fraud. For example, suppose the Chapter 7 trustee has a reasonable belief that you transferred the property to your children or intentionally failed to list assets on your bankruptcy schedules. In that case, the trustee can refer the case to the United States Trustee’s Office. Likewise, creditors and other interested parties may also report bankruptcy fraud to the United States Trustee.
The Federal Bureau of Investigations (FBI) investigates allegations of bankruptcy fraud. Many people may remember the cases of Abigale Lee Miller (“Dance Moms”) and Teresa Giudice (“Real Housewives of New Jersey”). Both spent time in prison for bankruptcy fraud.
Rule 2004 of the Federal Rules of Bankruptcy Procedure gives trustees and other interested parties a powerful tool to investigate suspected bankruptcy fraud. Under Rule 2004, debtors can be ordered to attend an examination (provide testimony) and produce documents related to their bankruptcy case. Failure to abide by a Rule 2004 order can result in court sanctions and penalties.
Convictions of bankruptcy fraud can result in lengthy prison sentences and substantial fines. A person could spend up to five years in federal prison and face fines of up to $250,000. The penalties could be more severe, depending on the facts of the case and whether the person is charged with multiple crimes.
A legal requirement for bankruptcy fraud related to the crimes listed above is that the person “knowingly” and “fraudulently” committed the act. In other words, the person intentionally and voluntarily committed the act to deceive.
While honest mistakes might not lead to bankruptcy fraud charges, they could still have serious consequences for a debtor.
For example, a debtor honestly forgets to list an asset on their Chapter 7 bankruptcy schedules. The Chapter 7 trustee discovers the assets and investigates. He finds that the debtor made an honest mistake and allows the debtor to amend the schedules to add the asset.
However, the Chapter 7 trustee objects to the debtor amending the bankruptcy exemptions to protect the asset. The judge grants the Chapter 7 trustee’s objection, so the debtor loses the assets because he forgot to list them when he filed the original bankruptcy forms.
When debtors sign bankruptcy forms, they sign the forms “under penalty of perjury.” That means they state under oath that the information reported on the forms is true and accurate to the best of their knowledge. Therefore, it is crucial that you review your bankruptcy schedules carefully to ensure that all information reported is accurate AND complete.
Bankruptcy fraud can take so many forms that it is impossible to list all of the ways that a debtor might try to defraud the bankruptcy system. However, some common forms of bankruptcy fraud include:
The bankruptcy process exists to help individuals who need debt relief. Contact Ascend to discuss debt-relief options if you cannot pay your bills, including filing a bankruptcy case. We can help you locate a bankruptcy attorney in your area and explore non-bankruptcy options to get rid of debt quickly and affordably.