Bankruptcy fraud is the abuse of bankruptcy law to hinder, delay, or defraud creditors and/or the bankruptcy court. Bankruptcy fraud may also refer to persons who defraud debtors in need of legal assistance.
Bankruptcy fraud is typically a civil matter handled by bankruptcy courts, but prosecutors can also bring criminal charges if the fraud is serious enough.
What Are the Most Common Types of Bankruptcy Fraud?
The most common types of bankruptcy fraud involve the debtor attempting to conceal property. Bankruptcy fraud by debtors may include, but are not limited to:
- Failure to report an asset
- Failure to name a creditor
- Concealment of assets or documents
- Destruction of assets or documents
- Making false statements under oath
- Transferring assets one year before filing bankruptcy
- Transferring assets during bankruptcy
- Purchasing luxury items ninety days before filing bankruptcy
- Purchasing luxury items during bankruptcy
- Redistribution arrangements made outside of the bankruptcy process
Debtors cannot conceal assets because bankruptcy courts need to collect and, if necessary, sell the debtor’s property to pay off the debtor’s debts. Although liquidation of the debtor’s property mostly occurs in Chapter 7 bankruptcy, it sometimes occurs in Chapter 13 bankruptcy if the repayment plan cannot satisfy enough debts. If the debtor conceals property, creditors will not be repaid, even though the creditors have a legal claim to collection.
Why Is Transferring Property before or during Bankruptcy Fraudulent?
Debtor property transfers made before or during bankruptcy are fraudulent because debtors often try to hide property by giving it away. For example, a debtor who knows that she will file for bankruptcy soon may give her car to her brother in the hopes that she won’t have to give the car away. After the bankruptcy is over, she may ask her brother for the car back. This type of transfer is illegal.
There are two ways for a bankruptcy trustee (the creditors’ attorney) to prove there has been a fraudulent transfer. The first way is to prove that the debtor actually intended to cheat her creditors when she gave her car to her brother.
However, proving actual intent is quite difficult. The trustee thus has a second method of proving there is a fraudulent transfer. If the debtor gave away her property for less than the property was worth and such a transfer was made while the debtor was unable to pay her debts, the transfer is considered fraudulent. Since the debtor gave her car to her brother for free and she was unable to make payments on her debt, the transfer would be considered fraudulent.
What Is a Luxury Purchase and Why Is It Fraudulent?
A luxury purchase is a purchase of goods or services which are worth more than $600 aggregate ninety days before the debtor files for bankruptcy. Such purchases are considered fraudulent because all debts are discharged, or terminated, at the end of bankruptcy. If the debtor runs to Los Vegas the weekend before appearing in bankruptcy court, it appears that the debtor went to Los Vegas with the expectation that the debtor will not have to legally pay back any purchases made while the debtor was in Sin City.
What Happens If the Debtor Is Convicted of Bankruptcy Fraud?
The punishment will depend on the type and severity of the fraud. If the debtor made a fraudulent transfer, the bankruptcy court can simply void the transfer and demand that the transferee return the disputed property. If the debtor made a luxury purchase, the bankruptcy court will make those purchases non-dischargeable. This means that all debts the debtor made while in Los Vegas will survive bankruptcy and the debtor will still have to pay for those bills.
If the debtor made an egregious fraud, the bankruptcy court can just dismiss the case. The bankruptcy will be over, but the debtor will still have to pay back all of his or her debts, regardless of whether the debtor’s assets were already sold or not. For example, if the debtor lies while under oath, the court will order that the case be closed. Of course, like all judges, the bankruptcy court can also hold the debtor in contempt of court.
In some cases, criminal prosecutors can also press charges. Criminal punishments can include fines or even prison time. These cases need to be serious though, such as attempted bribery of the bankruptcy trustee or starting businesses with the intent to never pay off creditors.
Can Non-Debtors Commit Bankruptcy Fraud?
Yes. Abuse of bankruptcy law to defraud creditors by anyone is fraudulent. Creditors can commit bankruptcy fraud if they defraud other creditors. Creditors can commit fraud by making debt arrangements with the debtor outside of the bankruptcy process after the debtor has filed for bankruptcy. Although debtors are allowed to reaffirm their debts with creditors or continue making payments to creditors during bankruptcy, the bankruptcy court must approve of such agreements. Neither the creditor nor the debtor can hide these agreements from the court.
Embezzlement of debtor estate funds by court officers can also be an issue. If a court officer breaches his or her fiduciary obligations, criminal and civil penalties will be enforced.
Are Bankruptcy Scams Fraudulent?
Yes. During the economic recession, financial predators would prey on desperate homeowners. If a debtor was in foreclosure, these predators would offer to "fix the problem" for a fee. The predator would file for bankruptcy in the debtor’s name, but without the debtor’s knowledge. Although filing for bankruptcy will stop foreclosure, bankruptcy protection against foreclosure is temporary if the debtor does not actually participate in the bankruptcy proceedings.
A few months later, the foreclosure would begin again, but the predator would disappear with the consumer’s money. Unfortunately for the consumer-debtor, his or her bankruptcy case was likely dismissed because the debtor never appeared in court. Since the Bankruptcy Code prohibits debtors from filing for bankruptcy multiple bankruptcies during an eight year period, the debtor would not only have his or her house foreclosed, the chance at a real bankruptcy would be gone as well.
Do I Need a Lawyer?
Bankruptcy can be a brutal and unforgiving legal process. Debtors and creditors can commit bankruptcy fraud without realizing what the consequences are until it is too late. Although the economic recession is ending, there are still bankruptcy scams ready to defraud consumers. If you need assistance with your case, consult a bankruptcy attorney or criminal defense attorney.