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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 Definition 

Bankruptcy fraud is a federal crime. It may also involve other crimes, such as identity theft, mortgage fraud, insurance fraud, and money laundering. 18 U.S.C. §152 defines nine instances of bankruptcy fraud:

  • Concealing property that belongs to the debtor
  • Making false oaths (lying or misleading) regarding any matters related to the bankruptcy case 
  • Making a false verification, declaration, statement, or certificate under penalty of perjury (under oath)
  • Filing or making false claims against the debtor’s estate
  • Fraudulent receipting property from a debtor
  • Bribery or extortion related to a bankruptcy case
  • Transferring or concealing property when considering filing bankruptcy 
  • Destroying or concealing documents related to the debtor’s financial affairs or assets
  • Withholding documents from the court, trustees, and other administrators of a bankruptcy case 

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. 

Five Things You Need to Know About Bankruptcy Fraud

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.

1.  Hiding assets is the most common form of 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:

  • Failing to list all property on bankruptcy schedules
  • Transferring property to another person for little to no value
  • Giving property to someone else to hold in anticipation of filing bankruptcy
  • Hiding assets in a storage building rented in another person’s name
  • Giving assets away in anticipation of filing bankruptcy, such as giving family heirlooms to relatives
  • Destroying documents related to property, such as destroying your will that outlines the property you want to give certain people after your death

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.

2.  Any interested party can report bankruptcy fraud

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.

3.  You could be forced to testify under oath and provide evidence regarding allegations of 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.

4.  Serious criminal penalties exist for bankruptcy fraud

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. 

Image shows potential bankruptcy fraud penalties
You could face up to 5 years in prison and a $250,000 fine

5.  Honest mistakes may not constitute fraud, but they can have serious consequences 

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.

Examples of Bankruptcy Fraud

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:

  • Giving a relative property to hide for you until your bankruptcy case is closed
  • Withdrawing money from financial accounts and burying it in your backyard
  • Filing bankruptcy under a false identity
  • Attempting to bribe a bankruptcy trustee or judge
  • Putting cash on a table and walking away while family members take the money so you can “honestly” say you do not know where the money went
  • Failing to include money you make from side jobs or under-the-table
  • Putting assets in your children’s names or a trust with the intent of filing a future bankruptcy case
  • Undervaluing assets on your bankruptcy schedules
  • Failing to list assets located in another state or country
  • Changing financial records to conceal assets or income
  • Selling your assets to a relative or friend for an amount that is much lower than the value of the assets
  • Paying debts to family or friends within one year before filing bankruptcy 
  • Filing multiple bankruptcy cases in different states
  • Concealing an interest in a family business or other business interest
  • Obtaining credit with the intent of filing bankruptcy to discharge the debts
  • Maxing out credit cards with the intent of filing bankruptcy to get rid of the debt

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. 

Post Author: Ascend

Group of guest writers and industry experts who have specific expertise in Chapter 13 bankruptcy, Chapter 7 bankruptcy, debt relief, debt settlement, and debt payoff.

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