What Is Bankruptcy Fraud?

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:

• accept that you might not be able to keep all of your property
• don't use bankruptcy to wipe out shady business dealings
• complete your bankruptcy paperwork truthfully, and
• learn the consequences of civil and criminal bankruptcy fraud.

Exchanging Property With Creditors for Debt Relief in Bankruptcy

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.

• In Chapter 7 bankruptcy, the bankruptcy trustee—the court-appointed official tasked with overseeing your case—sells nonexempt property and distributes the proceeds to your creditors.
• In Chapter 13 bankruptcy, the trustee doesn't sell property. Instead, you'll pay the value of the nonexempt property to creditors through a three- to five-year repayment plan.

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 That Starts Before Bankruptcy

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):

• obtaining credit under false pretenses, such as misrepresenting income or assets on a credit or loan application
• falsifying financial documents used to support a credit request (misrepresenting the debtor's worth)
• purchasing items on existing credit with no intention of repaying the debt (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. 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.

Fraud Committed During Bankruptcy

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:

• 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.

Bankruptcy Fraud Must Be Intentional

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.

Civil and Criminal Bankruptcy Fraud

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 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:

• dismiss the case and prohibit another filing for a period
• deny the discharge of the debt (the debtor remains responsible for paying it), or
• impose some other sanction.

Learn about presumptive fraud in bankruptcy—a trap that's not only easy to fall into but easy for a creditor to prove. Also, find out what happens when the bankruptcy trustee suspects fraud.

Criminal Bankruptcy Fraud

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.

Concealing Assets

• failing to disclose a property transfer that took place before filing the case
• failing to disclose assets in the bankruptcy paperwork, and
• enlisting someone's help to hide property.

Concealing and Falsifying Information

• filing a false or incomplete bankruptcy form, and
• destroying or hiding records.

Identity Issues and Unauthorized Filings

• filing a bankruptcy case using false identity information
• filing multiple bankruptcies in different jurisdictions, with or with property identification, and
• filing a bankruptcy case on another's behalf without authorization.

Bribery and Embezzlement

• bribing a trustee or court official, and
• embezzling funds from a bankruptcy estate.

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.

Avoid Bankruptcy Fraud–Consult With a Bankruptcy Lawyer

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.