What Is Bankruptcy Fraud?

Bankruptcy fraud is any action taken in a bankruptcy case that doesn't represent accurate information, which causes harm to another. To be convicted of fraud, you must have done something intentionally to gain an advantage during the bankruptcy process. If authorities charge you with fraud due to an honest mistake, you can defend yourself to rectify the error.

If the U.S. Department of Justice charges you with bankruptcy fraud, federal law stipulates that you may be subject to fines of up to $250,000 (which are not dischargeable debt) and a potential maximum prison sentence of five years. These laws are part of the Bankruptcy Code, 18 U.S.C.

Law enforcement will arrest you for these criminal charges, and the U.S. Attorney's Office will review your case. Through a full criminal investigation, authorities will review your history for financial crimes — any further hiding or lying could lead to perjury charges.

Bank fraud is a serious white-collar crime. You should contact a criminal defense lawyer immediately or work with your bankruptcy lawyer if they have defense experience with bankruptcy fraud cases.

Examples of Bankruptcy Fraud in United States Bankruptcy Courts

There are many ways someone can commit fraud during their bankruptcy filing. Making an honest mistake can happen. It's up to your attorney to prove your intent was not to break any bankruptcy law.

Avoid Common Mistakes

It's always better to be safe than sorry. You can avoid common mistakes by:

  • Completing paperwork and common forms from your bankruptcy trustee on time
  • Hiring a bankruptcy attorney to complete documents and forms
  • Disclosing all required assets and accounts
  • Double-checking that you completed all fields on all forms

Common Types of Bankruptcy Fraud

Common types of bankruptcy fraud involve a bankruptcy filer:

  • Concealment of assets: Hiding bank accounts or property or hiding the real value of assets
  • False statements or perjury: Lying about money or property on your bankruptcy petition
  • Money laundering: Transferring money to friends or family members or hiding it in cash
  • Petition mills: Taking on debt and filing bankruptcy over and over

Reasons Why Bankruptcy Filers Hide Assets

Facing bankruptcy can be scary, unknown territory initially. It's understandable to want to keep your home or car. But hiding these assets is not the way to go. Among other things, it's easy for your bankruptcy trustee to find them.

The U.S. Trustee Program (USTP) is crucial in the bankruptcy system. Its primary function is to review your case and assess your assets, ultimately crafting a fair debt repayment and dismissal plan.

Let's begin with the basics. In a Chapter 7 bankruptcy, you can use seized assets to pay off your secured debt. This can be debt related to a property like a house or a car. A bankruptcy trustee is responsible for your case and will decide what, if anything, they can sell to cover your debts.

States have exemptions specifying what can and cannot be seized. In most cases, you can retain ownership of a reasonably priced home or car. If you own your home or car outright, you can sell them voluntarily to settle your debts.

You must list all your property, whether owned, partially paid off, inherited, gifted, or from a personal or bank loan. This is your bankruptcy estate. This can feel like the bankruptcy courts are trying to take everything you own. So, some people commit fraud by leaving assets off this list.

You are required to put everything on this list. Your bankruptcy trustee will review the list and your state's rules on exemptions. Much of your property will be exempt in the bankruptcy proceeding. If you leave something off the list or transfer money to someone else to hide it, the money or asset can:

  • Become nonexempt
  • Be seized by the trustee

Hiding assets in a fraud scheme will backfire on many filers who would have had the property protected in the first place.

Lying About the Real Value of Your Property

Sometimes, people list assets but try to hide or downplay how much they're worth. Your trustee can have the property valued so they can find out the truth. Even if you weren't aware of how much an asset was worth and made an honest mistake, it could be concealment of assets or perjury. When in doubt, you or your attorney should get a fair property assessment before you list it on your bankruptcy forms.

Undervaluing property can be an "honest" mistake, but you should take every action to avoid it. Getting appraisals or finding old receipts on art, jewelry, equipment, and other assets will keep you safe in the long run. That does not mean a trustee will come to seize every expensive or sentimental item you own. Your state has wild card exemptions to help you keep some items.

Transferring Money or Property To Hide It From the Trustee

Your trustee can reflect on your history from 90 days to two years prior to the filing date. If you face criminal fraud charges and there's an evidence trail, the courts can look back even further. There is a statute of limitations of seven years for fraud. Fraud can open up a can of worms for past crimes and spread the blame to your family and friends.

It's not a good idea to hide assets and money before you file for bankruptcy. Your case does not start the day you submit forms. Your credit history and accounts can show all your past actions.

These are pre-bankruptcy actions. Everyday fraudulent pre-bankruptcy actions include:

  • Gifting large amounts of money or property to others
  • Transferring a car, boat, or property title to family or children
  • Selling a property for an insignificant amount of money (for example, selling a $20,000 boat to a friend for $500 so you can repurchase it later)

Some small charitable contributions are not considered fraudulent under the Bankruptcy Code.

The best way to avoid fraud in a situation like this is to disclose any sales, major changes, gifting, transfers, or other significant financial actions to your trustee. You can discuss what you did and why and work with your attorney if a transfer is in issue.

Taking on Debt and Filing for Bankruptcy on Purpose

While using bankruptcy to discharge your debt can feel like a "get out of jail free" card, filing for it over and over can be a form of fraud under criminal law. Chapter 13 bankruptcy requires a repayment plan, so it's more common for people to file Chapter 7 bankruptcy multiple times without intending to live debt-free.

Low-income filers often qualify for Chapter 7 based on the Means Test, and it is easy to feel like they will never be out of debt. Your credit score also takes a significant hit after filing for bankruptcy, making it hard to get decent loans and interest rates. Taking on new debt without intending to get out of the debt hole you dug can be tempting. But this is acting in bad faith and is a form of fraud.

Your trustee can review your past and future actions to see if you act in bad faith. Bankruptcy is on your record for seven to 10 years. Your bankruptcy trustee can examine any past bankruptcy cases to look for patterns. You may be charged with fraud if you act in bad faith, and your case will be denied.

New credit cards, luxury purchases, extravagant lines of credit, significant travel, multiple bankruptcies, or any out-of-the-ordinary behavior can appear to be taking on debt with no intention of paying it back.

Mistakes on Bankruptcy Forms

Honest mistakes do happen. Having a bankruptcy attorney on your side can help fix common errors and matters that must be cleared up during the process. They can also help you avoid mistakes before your trustee sees the paperwork.

A small mistake will not launch a criminal investigation into your case. But your trustee might decide the error was an attempt to hide assets. They may start to look over your forms with extra care. That can lead to charges of perjury or a fraud case against you.

Any incomplete or wrong information is always a red flag to bankruptcy trustees and the courts. Since debt relief is being requested as fast as possible, it's in your best interest to immediately clear up mistakes and be honest about your information.

How a Bankruptcy Attorney Can Help

It's very easy to make mistakes during bankruptcy. Your best course of action is to have an attorney helping you from the start. They can help you do it right the first time and avoid misinterpretations that come across as a fraud. If you're concerned that something you did in the past might come across as fraud, call a bankruptcy attorney. They might offer a free consultation. Your debt relief and future may depend on it.

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