Bankruptcy Fraud Consequences and Penalties

Making an error in a bankruptcy case comes with consequences. But because “the punishment must fit the crime,” some bankruptcy fraud penalties are more severe than others.

Bankruptcy fraud doesn’t occur as a result of an innocent mistake. For instance, if you forget to file a bankruptcy form and the court dismisses your case, you haven’t committed bankruptcy fraud, and you’ll be able to refile immediately. However, knowingly doing something to avoid paying a creditor will quickly get you into hot water, and the consequences will differ depending on whether:

  • a creditor files a civil fraud lawsuit, or
  • the Department of Justice alleges fraud in a criminal action.

What is Bankruptcy Fraud?

Although it occurs in only a small percentage of cases, most bankruptcy fraud has some connection with a debtor’s attempt to avoid paying creditors by concealing assets or abusing the system. For instance, bankruptcy fraud can occur as a result of:

  • purchasing an item on credit with no intention to pay for it
  • transferring property to someone for less than its actual value
  • overreporting income before filing for bankruptcy, or
  • inaccurately reporting property or income in bankruptcy.

Other offenses include the destruction of records, falsifying documents filed in court, using false identity information, bribing court officials, and stealing from the bankruptcy estate.

It isn't just the debtor who can run afoul of the law. Creditors sometimes knowingly file false proof of claims to collect money not owed. Lawyers sometimes attempt to bribe the bankruptcy trustee (the official responsible for overseeing the case) or the bankruptcy judge. And trustees have raided funds they’ve collected on behalf of creditors.

Civil Bankruptcy Fraud Consequences

Civil actions are often brought by a single creditor seeking a remedy against a debtor for an isolated action (instead of a broader action filed by the Department of Justice). For instance, a creditor might claim that the debtor lied about income when requesting credit or show that the debtor never intended to repay an obligation.

The level of proof necessary to bring civil sanctions against a debtor or others in the bankruptcy court is much lower than what the DOJ must prove in a criminal case. Therefore, regardless of whether there is a criminal proceeding, the bankruptcy court has at its disposal several options:

  • Dismiss the bankruptcy case. The bankruptcy court can dismiss a matter on its own motion or the motion of a creditor or the trustee. The judge can also impose a restriction that would prevent a new case filing for some time (or permanently in a particularly egregious matter)—a remedy that’s common when a debtor has tried to avoid paying a creditor by repeatedly filing and dismissing a case.
  • Deny discharge. The bankruptcy court can also deny your overall bankruptcy discharge (the order that wipes out debt) or the discharge of a particular debt. A denial of discharge will allow the creditor to collect the debt after the bankruptcy case.
  • Other remedies. The bankruptcy code gives the judge discretion to enter whatever orders are necessary in the bankruptcy case, including the power to hold a party in contempt of court. A finding of contempt usually brings with it a fine and might include an injunction that stops someone from doing a particular action. For instance, the court could deny a creditor’s claim, hold the creditor in contempt for filing a false claim, and enjoin the creditor from filing any further claims in the case.

Learn more about proving bankruptcy fraud.

Criminal Bankruptcy Fraud Penalties

A criminal bankruptcy fraud case will tend to involve a more elaborate scheme than what the average person would attempt, with the debtor knowingly executing a plan impacting numerous, if not all, creditors. And it doesn’t happen in a vacuum. The actions leading to prosecution for bankruptcy crimes can violate other federal statutes. For instance, an indictment for bankruptcy fraud often includes counts for perjury, tax fraud, bank fraud, wire mail fraud, identity theft, and conspiracy, bringing a schedule of penalties adding years to sentences imposed for bankruptcy crimes.

The Federal Bureau of Investigation (FBI) investigates bankruptcy crimes. If it appears that a crime has been committed, the case will proceed to the U.S. Department of Justice (DOJ) for prosecution. If convicted, sentencing for a conviction could include any or all of the following:

  • probation or special monitoring
  • up to twenty years in federal prison
  • a fine of $250,000 for each count
  • an order to pay restitution, and
  • community service.

Example. In a well-known bankruptcy case, Joe and Teresa Giudice (from the Real Housewives of New Jersey) plead guilty to 41 federal counts of criminal behavior, including bankruptcy fraud. At sentencing, Mrs. Giudice received 15 months in prison while her husband received 41 months. Together they were ordered to pay restitution of $414,000. The court allowed them to serve the sentences consecutively (one following the other) so that a parent would remain home to care for their young children during the incarceration period.

Bankruptcy fraud, a federal felony, is serious and carries with it significant penalties that can affect your life for years, well beyond any benefit received from committing the crime.

Other Criminal Bankruptcy Fraud Consequences

A federal felony comes with more than a formal sentence—many of your rights will be restricted, sometimes for life. For instance, you might not be able to:

  • vote
  • travel outside the country
  • own a firearm
  • serve on a jury
  • qualify for some jobs and security clearances, and
  • obtain welfare benefits and housing assistance.

Regardless of immigration status, non-citizens convicted of a felony are subject to deportation. Mr. Guidice, referenced above, is not a citizen of the United States. When he completes his prison term, he could face deportation.

Speak With a Bankruptcy Lawyer

Errors occur in bankruptcy on occasion. If you’re concerned that you’ve made a mistake in your paperwork or bankruptcy case, a bankruptcy attorney can help you make the proper adjustment promptly.

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