Bankruptcy fraud encompasses a wide array of offenses in the federal criminal justice system, including perjury, concealment of assets, destruction of records, misrepresenting income, and overstating expenses. In all cases, the government has the burden of proving the crime, and the defendant (the person charged) has the right to mount a defense to cast doubt on the prosecution's case.
About 70% of bankruptcy fraud occurs when the debtor (bankruptcy filer) tries to hide an asset or undervalues the asset so that the bankruptcy trustee—the official appointed to oversee the case—can’t or won’t seize it. The second highest incidence of fraud occurs when the debtor misrepresents income or expenses to qualify for a Chapter 7 bankruptcy or to lower Chapter 13 payments. But creditors, trustees, court personnel, and others have also been known to steal or otherwise cheat the system, too.
In a criminal prosecution for bankruptcy fraud, the defendant accused of a crime isn’t required to prove innocence. Instead, the government has the burden of presenting enough evidence to show beyond a reasonable doubt that the defendant committed every element of the crime.
For most bankruptcy crimes committed by debtors, proving bankruptcy fraud took place entails establishing that the debtor intended to deceive, hinder, or delay the court or creditors. Because intent is a state of mind, it’s difficult to prove. Prosecutors must rely on other clues or circumstantial evidence that, taken together, would lead a jury to find beyond a reasonable doubt that the debtor intended to defraud creditors.
Although the defendant doesn’t have to prove innocence and isn’t required to put on a case at all, most defendants will attempt to sow seeds of doubt in the prosecution’s case by putting on a defense. Most defenses contradict the prosecution’s theory of the case, refute the relevance or the truth of the prosecution’s evidence, or offer alternative explanations for the defendant’s actions.
Here are some examples of possible defenses.
The defendant might claim that the failure to list a valuable asset or to disclose the transfer of an asset in the bankruptcy petition was accidental. For instance, the debtor could present evidence that the attorney preparing the petition knew about the missing information but the debtor didn’t notice that it wasn’t included before signing the schedules and statements filed with the court.
The defendant could present evidence that a particular action was taken to accomplish a lawful purpose. For instance, the defendant might have sold an asset for half its value to take advantage of a tax deduction.
The debtor could argue that the government lost the right to prosecute the crime because the statute of limitations period for bankruptcy fraud—the time the government has to bring an action—already elapsed. For most bankruptcy crimes, the statute of limitations is five years from the date of the offense. When the crime is concealment of assets, the limitations period runs five years from the date of discharge or denial of discharge.
The debtor might testify or present evidence showing a correction of the paperwork occurred soon after the debtor discovered the error or regretted the decision to omit the asset intentionally.
The penalties associated with bankruptcy fraud are steep. If you find yourself facing charges, or suspect you might, you should speak with a knowledgeable bankruptcy lawyer.