What Is Bankruptcy Fraud?

Committing fraud before or during bankruptcy can result in serious consequences, including a denial of discharge, a fine, or even a criminal conviction.

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, or inappropriately use the bankruptcy process to prevent creditors from receiving money they’d otherwise be entitled to, you could be found guilty of fraud. Here’s why.

Giving Up Property in Exchange for Debt Relief

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 this loss by allowing creditors 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 a three- to five-year repayment plan. This system gives your creditors a share of your nonessential assets in exchange for wiping out your debt.

Concealing Property When Filing for Bankruptcy

Although the majority of people who file for bankruptcy are honest and transparently report all assets, 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 fraudulent:

  • failing to list an asset on the appropriate bankruptcy schedule to prevent it from being sold for the benefit of creditors
  • concealing a property transfer that occurred before the bankruptcy (for example, failing to disclose gifting a car to a friend)
  • providing a false document to the bankruptcy court or trustee
  • destroying or withholding documents
  • knowingly making a false statement in the bankruptcy paperwork or to the bankruptcy trustee at the 341 meeting of creditors, or
  • paying someone to help hide property from the court.

How to Avoid Committing Bankruptcy Fraud

Individuals considering filing for bankruptcy can take steps to avoid fraud 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 be expected to disclose by reviewing the official bankruptcy paperwork.

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

Committing Fraud Before Bankruptcy

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

  • obtaining credit under false pretenses, such as misrepresenting income or assets on an application
  • falsifying financial documents used to support a credit request to inflate (or decrease) the debtor’s worth
  • purchasing items on existing credit with no intention of repaying the debt (this can be proven by showing the lack of an ability to pay at the time of purchase)
  • charging expensive luxury items or taking out substantial cash advances shortly before filing for bankruptcy (often called “presumptive fraud”)
  • knowingly writing a bad check, or
  • engaging in deceptive business practices.

Be aware that the bankruptcy trustee will often work closely with a creditor or interested party when that person is making a fraud claim. (Learn more by reading When the Bankruptcy Trustee Suspects Fraud.)

Suing for Fraud: The Adversary Proceeding

A creditor that believes a debtor has committed fraud must file a lawsuit (adversary proceeding) in the bankruptcy court. 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:

  • deny the discharge of the debt
  • dismiss the entire bankruptcy case
  • assess the debtor with a fine of up to $250,000, or
  • sentence the debtor to up to 20 years in prison.

Rest assured that it’s unlikely for a debtor to face fraud allegations without warning. Most filers are aware that they might be accused of fraud beforehand. If you suspect that might be the case, you should consult with a knowledgeable attorney before filing for bankruptcy.

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