Bankruptcy Fraud: Legal Definition, Examples, and Penalties

Under federal law, a person commits bankruptcy fraud when they take any action in a bankruptcy case that doesn’t accurately represent the facts and causes harm to another. For the government to convict you of this crime, it must prove that you intentionally did something to gain an advantage during the bankruptcy process.

In this article, we’ll explain what bankruptcy fraud is and what to do if the government charges you with this crime. We will also provide examples of bankruptcy fraud and what happens if the state convicts you of this serious offense.

Bankruptcy fraud is a serious white-collar crime. If you’re facing charges or think you’re under investigation, consider contacting a criminal defense lawyer. If you’re already working with a bankruptcy attorney, they may also be able to assist you with criminal charges if they have defense experience with bankruptcy fraud cases.

Legal Definition of Bankruptcy Fraud

Whether you handle your bankruptcy case yourself or have a bankruptcy attorney, it’s important that you understand how the government defines bankruptcy fraud. A conviction for this offense can result in a lengthy prison sentence and hefty fines.

You can find the statutory definition of bankruptcy fraud at 18 U.S.C. § 152. This federal law governs fraud in bankruptcy proceedings. Under this law, a person is guilty of bankruptcy fraud when they engage in the following:

• Concealing property that is rightfully part of the bankruptcy estate
• Making a false oath or statement under penalty of perjury
• Submitting a false proof of claim against a debtor’s estate
• Providing false information to the bankruptcy trustee, court, or creditor
• Accepting property from a debtor to avoid that property being used to pay creditors
• Offering or receiving money (bribe) to act or not act in a bankruptcy case
• Transferring or concealing a company’s assets related to a bankruptcy
• Altering, destroying, or concealing records or documents

If you’re discovered engaging in any of these activities, you’ll face criminal charges. Penalties include prison time and fines.

What the Government Must Prove

To convict you of bankruptcy fraud, the government must prove the following elements beyond a reasonable doubt:

• Intent: You acted knowingly and intentionally, not mistakenly or accidentally
• Course of conduct: You had a plan to deceive the bankruptcy court
• Deliberate deception: You intended to deceive the bankruptcy trustee, judge, court, or creditors
• Connection to bankruptcy: Your actions related to the bankruptcy process

If the government’s prosecutor can prove these elements, they will likely secure a conviction. Given the complexity of federal prosecution, having a criminal defense attorney is your best option.

Intent vs. Honest Mistakes: The Critical Distinction

The most important element in bankruptcy fraud cases is intent. The government must prove you acted “knowingly and fraudulently,” meaning you were aware of the circumstances and knew you were deceiving the court.

For bankruptcy fraud purposes:

• “Knowingly” means you were aware of the circumstances and knew you were deceiving the court or trustee
• “Fraudulently” means you acted in a way you knew was dishonest and untruthful

The table below highlights the key differences between honest mistakes and intentional fraud in a bankruptcy case:

Not realizing that you had to include rental income or alimony in your petition may be considered an honest mistake. If you received undisclosed income through embezzlement or illegal activity and deliberately omitted it because disclosure would result in case dismissal, that’s bankruptcy fraud. 

Federal Bankruptcy Fraud Statutes

The most relevant federal laws relating to bankruptcy fraud are:

How Fraud Laws Apply to Different Bankruptcy Types

The bankruptcy fraud laws apply to all three main types of bankruptcy:

• Chapter 7 (Liquidation): To qualify, you must demonstrate you cannot feasibly pay your debts given your income and liquid assets. Fraud includes inflating debts, lying about income, or intentionally omitting creditors to retain assets or credit lines.
• Chapter 13 (Individual Reorganization): This reorganizes debt into a 3-5 year repayment plan. The trustee determines your monthly payment based on income. Misrepresenting your income to reduce monthly payments constitutes fraud.
• Chapter 11 (Business Reorganization): This allows a business to stay afloat by reorganizing its debts. Business owners who lie about company debts, assets, or income to deceive the bankruptcy court face potential criminal charges.

Regardless of the type of bankruptcy, dishonesty about your financial situation can trigger a government investigation into bankruptcy fraud. These are federal crimes prosecuted in federal court.

Common Types of Bankruptcy Fraud

Most people who file for bankruptcy do so in good faith, with no intention of deceiving the trustee or the courts. However, some filers decide during proceedings to make false statements or hide assets.

Common types of bankruptcy fraud include:

• Concealment of assets: Hiding bank accounts, property, or the true value of assets
• False statements or perjury: Lying about money or property on bankruptcy petitions or at hearings
• Fraudulent transfers: Moving money or property to friends or family members before filing
• Petition mills: Repeatedly filing for bankruptcy to discharge debt, then incurring new debt
• Undervaluing assets: Misrepresenting the worth of property to avoid seizure

Bankruptcy courts have seen nearly every type of fraud imaginable, as have the government agencies that uncover and investigate them. You’ll find yourself at a severe disadvantage without a bankruptcy fraud lawyer in your corner, and the penalties can destroy your life.

Concealing or Hiding Assets in Bankruptcy

The U.S. Trustee Program (USTP) reviews your bankruptcy case and assesses your assets to craft a fair debt repayment and dismissal plan. In Chapter 7 bankruptcy, a bankruptcy trustee decides what, if anything, to sell to cover debts.

You must list all property in your bankruptcy estate, whether it’s owned, partially paid, inherited, gifted, or from loans. States have exemptions specifying what can and cannot be seized. In most cases, you can retain a reasonably priced primary home or car. Trustees won’t seize every expensive or sentimental item you own, as your state provides wildcard exemptions to help you keep some items.

Your bankruptcy trustee reviews your asset list and applies your state’s exemption rules. Much of your property will be exempt from the proceedings. However, if you leave something off the list or transfer money to someone else to hide it, that money or asset can become nonexempt or be seized by the trustee. Hiding assets often backfires, as many filers would have had the property protected if they’d disclosed it honestly.

Sometimes people list assets but downplay their worth. The trustee will appraise your property to determine its true value, and even honest mistakes about asset value may be deemed concealment or perjury. Your attorney should get fair property assessments before listing assets on bankruptcy forms. Getting appraisals or finding receipts for art, jewelry, equipment, and other valuable items protects you from accusations.

Fraudulent Transfers Before Bankruptcy

Your bankruptcy trustee reviews all property transfers from 90 days to two years before filing. If the government suspects fraud, it can go back further. The statute of limitations for bankruptcy fraud is seven years.

Hiding assets and money before filing for bankruptcy is not a great idea. Suspicious activity includes:

• Gifting large amounts of money or property
• Transferring titles to cars, boats, or other property to family members
• Selling property for insignificant amounts (e.g., a $20,000 boat to your brother-in-law for $500 so you can repurchase it later)

In general, small charitable contributions aren’t deemed fraudulent under the Bankruptcy Code.

The best way to avoid fraud charges is to disclose any sales, major changes, gifts, transfers, or other significant financial actions to your trustee. Work with your bankruptcy attorney if there are questions about property transfers.

False Statements and Perjury in Bankruptcy

Perjury occurs in bankruptcy when you make false statements or provide misleading information on your bankruptcy petition and forms, even if not under oath. The court examines both commissions (false statements) and omissions (failures to disclose).

Common false statements leading to fraud charges include:

• Underreporting income
• Hiding accounts
• Overstating debts
• Creating fake creditors
• Submitting inflated proofs of claim

At your 341 Meeting of Creditors, your bankruptcy trustee presents your proposed discharge or repayment plan to creditors, who can object. If you make false statements at this meeting or on your forms, the government can file fraud charges.

For conviction, your deceptive statements must be material to your case. If false statements have no real bearing on the outcome, the government probably won’t pursue charges.

Petition Mills and Serial Filings

While bankruptcy can discharge debt for people in legitimate financial distress, repeatedly filing bankruptcy petitions only to incur new debt may constitute fraud. The trustee applies the Means Test to determine if your debt-to-income ratio justifies discharge or a repayment plan.

If you act in bad faith or take unfair advantage of the bankruptcy process, the trustee will discover it. All bankruptcies remain on your record for between seven and 10 years. Your trustee can examine past cases for patterns of abuse.

Be wary of petition mills. These companies prey on people with financial problems, charging exorbitant fees while filing incomplete bankruptcy petitions. They continue charging fees while courts process deficient petitions, leaving clients with terrible credit, unpaid debts, and dismissed cases. Report suspected petition mills to the local bankruptcy court and contact a legitimate bankruptcy attorney.

Penalties for Bankruptcy Fraud

According to federal law, a person found guilty of bankruptcy fraud faces:

Criminal penalties, including:

• Prison: Up to 5 years in federal prison
• Fines: Up to $250,000
• Both fines and prison (depending on case facts)

Consequences in their bankruptcy case, such as:

• Case dismissal
• Denial of discharge (you still owe debts)
• Bar on filing bankruptcy again for a certain period
• Fraudulent debt becomes non-dischargeable, even in future bankruptcies

Civil penalties, such as:

• Trustee can recover hidden assets
• Creditors can sue you for damages
• You may pay restitution to harmed parties

Additional consequences, including:

• Professional license revocation or suspension
• Difficulty securing housing, employment, and credit
• Deportation (for non-U.S. citizens)

Bankruptcy is a complicated process. There’s no shame in reaching out to a bankruptcy attorney for legal aid to avoid making mistakes.

How Bankruptcy Trustees Detect Fraud

The U.S. Trustee Program investigates bankruptcy petitions and supplemental documents to identify possible fraud. Trustees examine:

• Bankruptcy schedules and statements
• Tax returns (2 years required)
• Bank statements and pay stubs
• Asset valuations
• Credit reports and financial records
• Large transactions before filing
• Lifestyle inconsistencies with reported income

Trustees also evaluate petitions during the 341 Meeting of Creditors, where they and your creditors question you under oath about your financial situation.

Red flags that trigger investigations include:

• Transfers to family/friends before filing
• Undervalued assets
• Missing or incomplete records
• Inconsistent income/expense ratios
• Recent luxury purchases
• Multiple bank accounts or addresses
• Cash-based lifestyle with low reported income
• Creditor complaints and tips

Your bankruptcy lawyer can attend the Meeting of Creditors with you and prepare defenses for questionable activities.

If the U.S. Department of Justice suspects bankruptcy fraud, law enforcement will arrest you and file criminal charges. The U.S. Attorney’s Office will review your case, conduct a thorough investigation, and determine whether to pursue charges. They may also file perjury charges if they suspect false statements.

Defenses to Bankruptcy Fraud Charges

Your criminal defense lawyer or bankruptcy lawyer will craft a defense strategy tailored to your case. Possible defenses include:

• Lack of intent: Honest mistake, misunderstanding of requirements, or reliance on incorrect advice
• Good faith reliance on attorney: You disclosed all information to your attorney and followed their guidance
• Actual disclosure: Required information was in your petition or provided at the 341 meeting
• Immateriality: Errors had no effect on creditors, or the asset was fully exempt or had minimal value
• Statute of limitations: The window allowing charges to be filed has expired (starting from the discharge or denial date)
• Insufficient evidence: The government can’t prove intent beyond a reasonable doubt

Your criminal defense attorney will likely work with your bankruptcy attorney to understand how your petition and proceedings occurred.

How To Avoid Bankruptcy Fraud Accusations

Taking the right steps from the moment you file until you receive discharge can help you avoid fraud accusations.

Complete disclosure:

• List every asset, even if exempt
• Report all income sources
• Disclose all bank accounts, even closed ones
• Include pending lawsuits, insurance claims, and inheritances

Accurate valuations:

• Get professional appraisals for valuable items
• Use fair market value, not sentimental value
• Don’t guess on asset values

Document preservation:

• Keep all financial records
• Don’t destroy anything
• Organize documents before filing

Pre-filing transfers:

• Avoid transferring assets before filing
• Disclose any transfers in the lookback period
• Get attorney advice before selling anything

Trustee cooperation:

• Provide requested documents promptly
• Answer questions truthfully
• Don’t make up answers

If you find an error in your bankruptcy filing, correct it immediately to demonstrate good faith. Promptly addressing mistakes can lead the government to dismiss or reduce charges.

How to properly correct mistakes:

• File an amended petition immediately
• Notify your trustee in writing
• Provide an explanation for the error
• Gather supporting documentation showing good faith

Work with a qualified attorney:

It’s essential to complete all paperwork on time and double-check that you’ve completed all fields. An experienced bankruptcy attorney will review all disclosures, catch errors before filing, know what you must disclose, and prepare you for the 341 Meeting.

Get Legal Help

Bankruptcy fraud carries severe consequences, including up to five years in federal prison and fines of up to $250,000. An experienced bankruptcy attorney is essential whether you’re planning to file, need to correct a mistake, or are facing fraud accusations.

An experienced bankruptcy attorney will:

• Review all disclosures
• Catch errors before filing
• Know what you must disclose
• Prepare you for the 341 Meeting

Many bankruptcy attorneys offer free initial consultations to review your situation, assess potential fraud risk, explain legal options, and outline costs and timelines.

Finding a qualified bankruptcy attorney can make a huge difference in your filing. Whether you need help filing your petition, correcting a mistake, or defending against fraud accusations, experienced legal representation can protect your financial fresh start and your freedom.