Filing for bankruptcy is a great way to get a fresh start. But you must play by the rules. Any dishonest dealings before or during the bankruptcy process could rise to the level of bankruptcy fraud, so avoid needless trouble by following these tips:
While the powerful relief afforded by bankruptcy frees you from overwhelming debt, it comes at a cost to your creditors. Bankruptcy law attempts to mitigate this loss by giving your creditors a share of your nonessential assets in exchange for wiping out your debt. You'll disclose all property you currently own (and asset transfers) and keep the things you can exempt—generally property needed to maintain a job and home.
Here's what will happen to the rest.
Remember that your creditors are entitled to receive certain property or payments—it's part of the deal. Hiding assets, knowingly omitting required information on bankruptcy paperwork, or inappropriately using the bankruptcy process to a creditor's detriment could be considered bankruptcy fraud.
Fraud doesn't always play out within the bankruptcy itself—it can occur before the bankruptcy filing. This problem often arises when someone tries to erase a prior bad act using bankruptcy. Here are examples of fraudulent behavior that might cause a creditor to ask the court to deny your discharge of a particular debt (you'll still owe it after the case ends):
Be aware that the bankruptcy trustee will often work closely with a creditor or interested party when that person is making a fraud claim. For instance, if a creditor asks uncomfortable and probing questions 341 meeting, the trustee will likely continue the meeting to allow the creditor more time. Why would the trustee want to get involved? Because dishonest debtors hide assets, and the more assets the trustee finds, the more the bankruptcy trustee gets paid.
Learn more by reading When the Bankruptcy Trustee Suspects Fraud.
Most people who file for bankruptcy are honest and transparently report all assets. Still, it's not always the case—and succumbing to the temptation to hide property can result in a bankruptcy fraud accusation. Here are examples of actions that, if intentional, would likely be problematic:
You'll only run into trouble if it's believed that you knowingly and intentionally committed a fraudulent act. Why? Because bankruptcy fraud doesn't happen by accident or mistake. For instance, accidentally forgetting to list an asset or incorrectly stating your income or expenses probably wouldn't rise to the level of fraud. However, if you failed to list your vacation home in your bankruptcy paperwork, hoping that the trustee wouldn't find out about it, it's likely you've knowingly and intentionally done the following: hidden an asset, filed a false form, and committed perjury.
Not all fraud is the same. The severity of the consequences for civil versus criminal fraud differs substantially. Learn more about the differences between these two types of bankruptcy fraud.
Civil cases usually arise when a creditor files a lawsuit (adversary proceeding) alleging wrongdoing involving one particular debt (see "Fraud That Starts Before Bankruptcy" above for a list of examples of common allegations). If the creditor proves its case, the filer will face a variety of consequences. For instance, the court can do one or more of the following:
A significant scheme to deprive multiple creditors would be more likely to rise to the level of criminal bankruptcy fraud. Under federal law, cases of criminal fraud are investigated by the Federal Bureau of Investigation (F.B.I.) and aggressively prosecuted by the U.S. Department of Justice (D.O.J.). Although the bulk of the crimes apply to debtor activities (the person who files the case), creditors, bankruptcy trustees, court personnel, and third parties can also be convicted of bankruptcy crimes.
Also, many types of dishonesty are often involved in criminal bankruptcy fraud, some of which are also crimes. You'll find most bankruptcy crimes in federal criminal statutes. (18 U.S.C. §§ 152, 157.) Here are some examples.
Along with bankruptcy fraud, federal prosecutors often add counts for other federal crimes. For instance, the D.O.J. might prosecute someone for perjury who fails to list an asset on bankruptcy schedules. Also, prosecutions often include tax fraud, wire fraud, mail fraud, money laundering, bank fraud, identity theft, or conspiracy, each of which brings separate penalties.
The consequences of engaging in criminal bankruptcy fraud can be harsh. Anyone who makes a knowingly false statement in association with a bankruptcy filing can be assessed fines up to $250,000 and receive up to 20 years in prison. If you're looking for information about penalties associated with bankruptcy fraud—such as jail time, fines, and more—go to Bankruptcy Fraud Consequences and Penalties.
Rest assured that it's unlikely for a debtor to face fraud allegations without warning. Most filers are fully aware of their past actions and know to expect a possible fraud accusation. If this is a concern, consult with a knowledgeable bankruptcy attorney.
Other individuals considering filing for bankruptcy can take steps to avoid fraud allegations by transparently disclosing financial information. For instance, a debtor should be prepared to list all income, property, creditors (even if the intention is to repay a particular creditor after the bankruptcy), and prior transactions (such as property sales, donations, and gifts). You can learn what you'll disclose by reviewing the official bankruptcy paperwork.