What Is Bankruptcy Fraud?

You must report all of your assets and transactions in your bankruptcy paperwork to avoid running afoul of criminal charges.

When filing for bankruptcy, you’re expected to list all of the property that you currently own, as well as any assets that you’ve transferred to others within a particular period. If you knowingly omit required information when filling out your  bankruptcy paperwork, you could be found guilty of fraud. Here’s why.

The relief afforded by bankruptcy is powerful because it frees you from overwhelming debt. However, it comes at a cost to your creditors. Bankruptcy law attempts to mitigate the loss to your creditors by allowing them to receive a portion of your property. You get to  exempt  (keep) assets that you’ll need to maintain a job and household. The remaining property belongs to what’s known as the bankruptcy “estate.”

In a  Chapter 7 bankruptcy, the bankruptcy trustee—the court-appointed official tasked with overseeing your case—will sell the nonexempt bankruptcy estate property and distribute the proceeds to your creditors. It works differently in a  Chapter 13 case  because the trustee doesn’t sell your property. Instead, you’ll pay the value of the nonexempt property to your creditors in your three- to five-year repayment plan. This system gives your creditors a share of your nonessential assets in exchange for wiping out your debt.

Although the majority of people who file for bankruptcy are honest and report all of their property in a transparent manner, it doesn’t always happen that way. When someone succumbs to the temptation to hide property, the filer risks an accusation of bankruptcy fraud. Here are examples of actions that, if intentional, would probably be considered criminal:

  • failing to list all assets on the appropriate bankruptcy schedule
  • concealing a property transfer that occurred before the bankruptcy (for example, giving your car to a friend)
  • creating a false document,
  • destroying or withholding documents, and
  • paying someone to help hide property from the court.

The consequences of engaging in such activities 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 (as of October 2016).

(For in-depth information about bankruptcy fraud, read  Hiding Assets in Bankruptcy.)

Additionally, fraud isn’t always directly connected to your bankruptcy filing. It can occur before the bankruptcy filing takes place. Here are examples of fraudulent behavior that might cause a creditor to ask the court to deny you a discharge of a particular debt:

  • knowingly writing a bad check
  • overstating income when applying for credit, or
  • buying luxury items on credit before filing.

(For more information about the procedure that a creditor must use to object to the discharge of a debt, readNondischargeability Complaints in Bankruptcy.)

If you suspect that the trustee or a creditor might accuse you of engaging in fraudulent activity, it’s best to consult with a knowledgeable attorney before filing for bankruptcy.

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