When filing for bankruptcy, you must list all your assets and liabilities. Failure to do so could result in violations of bankruptcy laws and serious consequences, whether it’s civil or criminal fraud.
Written by Attorney Alexander Hernandez.
Updated August 5, 2020
Bankruptcy fraud is a federal crime that is punishable by up to 5 years in federal prison and a fine up to $250,000. The fine can’t be discharged in bankruptcy. Because bankruptcy fraud is a serious crime, it’s important for every bankruptcy filer to be aware of the common types of bankruptcy fraud and the consequences associated with violating bankruptcy laws.
What is Bankruptcy Fraud?
Under the Bankruptcy Code, bankruptcy fraud is defined in broad terms and could be committed by anyone involved in a specific case, including debtors, bankruptcy attorneys, and even creditors. Committing bankruptcy fraud could result, at a minimum, in having the case dismissed and/or having a fine imposed by the court. For more serious cases, a substantial fine and/or a prison sentence could be handed down.
There are two types of bankruptcy fraud: civil fraud and criminal fraud. Civil bankruptcy fraud doesn’t amount to a criminal act, but it can still have serious consequences. For example, forgetting to list a creditor is not likely to qualify as bankruptcy fraud, but if a creditor is omitted on purpose, this could be considered civil fraud.
Generally speaking, someone must intend to commit fraud for charges to stick. The penalties for civil fraud vary, depending on the facts of the case. For example, a filer may lose the protection of exemptions. This is significant because once assets lose their protected status, they will belong to the bankruptcy estate. The trustee can then sell the assets to repay creditors.
Another example of civil bankruptcy fraud involves serial filing. A serial filer is someone who abuses the bankruptcy court system by submitting multiple bankruptcy filings with no intent to finalize the bankruptcy cases by receiving a discharge. Serial filers often file bankruptcy petitions numerous times to delay a foreclosure or eviction to take advantage of the automatic stay. A bankruptcy judge may penalize a serial filer by preventing them from filing for bankruptcy for a certain period of time, issue a fine, or dismiss the case.
Criminal bankruptcy fraud is a more serious offense that could result in a prison sentence. One type of bankruptcy crime involves hiding assets or concealment of assets which is a violation of Sections 152(1) and (7) of Title 18 of the United States Code. If someone helped hide assets by pretending there was a sale or transfer, that person may also be subject to criminal charges as they’re part of a fraud scheme under 18 U.S.C. §157. If an attorney and the client were part of the fraud scheme, the attorney-client privilege doesn't apply. If an asset was transferred to a friend or family member, even if they didn’t know the intent of the filer, they’ll still be investigated and may have to hire a criminal defense lawyer to protect their rights.
The facts of the bankruptcy case will determine whether there is a civil or criminal bankruptcy fraud issue. The intent of the filer is also important since there is a difference between, for example, failing to disclose the transfer of an asset by mistake versus intentionally. In addition, the judge will likely consider the value of the asset that was transferred. Is it a car with a minimal value that was transferred to a son or daughter as a gift, or is it an asset worth substantially more? Even if it’s not criminal fraud, the bankruptcy trustee still has the option to file an adversary proceeding to recover the asset(s) to include it as part of the bankruptcy estate. Under 11 U.S.C. § 548, a trustee has the authority to void the transfer, even if the transfer by itself was legal and done before the bankruptcy filing.
Bankruptcy Fraud Criminal Investigations
Bankruptcy fraud can be discovered in several ways. For example, bankruptcy fraud can be reported by family members, colleagues at work, former business partners, or ex-spouses. Creditors can also serve as a source of information for the trustee. The bankruptcy court website located in your district has links that provides information on how to report fraud and includes contact information. For example, an email can be sent to USTP.Bankruptcy.Fraud@usdoj.gov. The U.S. Trustee can also be contacted by mail at the Office of the U.S. Trustee, ATTN: Office of Criminal Enforcement, George C. Young Federal Building and Courthouse, 400 W. Washington Street, Suite 1100, Orlando, FL 32801.
Public records are also a good source of information for trustees. Information that is available in the public records includes prior real estate and/or cars owned, sold or transferred, and the parties that were involved. Trustees also use private companies similar to companies that perform background checks for additional information. Also, the trustee should be able to determine potential fraud by reviewing the documents provided by the filer, creditors, and all attorneys involved, and by questioning the filer at the 341 meeting of creditors (11 U.S.C. § 341.) At the hearing, the trustee may discover additional crimes. For example, before the 341 meeting begins, filers are sworn in and agree under oath to be truthful under penalty of perjury. If the filer lies while under oath, that could result in an additional criminal charge.
If a trustee suspects fraud, the bankruptcy case will be referred to the United States Trustee’s Office. If the U.S. Trustee’s Office concludes there was bankruptcy fraud, depending on several factors, there may be further investigations by the Federal Bureau of Investigation (F.B.I.). Complicated cases such as mortgage fraud, bank fraud, money laundering, and bribing court officials are examples of white-collar crimes that may also be investigated by the F.B.I. or referred directly to the Department of Justice for prosecution. Because these are violations of federal laws, investigations and prosecutions are conducted by the federal government. Since bankruptcy court is part of the federal court system, prosecutions are pursued by the United States Attorney’s Office for the district wherein the case was filed.
As you can see, bankruptcy crime is a serious offense and an investigation won’t only affect you, but anyone else that was involved even if they had the best of intentions by trying to help you.
Bankruptcy Fraud Criminal Penalties
If someone is convicted of bankruptcy fraud, they face a maximum penalty of 5 years in prison and a potential fine of up to $250,000, which is non-dischargeable. Also, if there are other crimes such as perjury, each act of perjury also has a maximum of 5 years in prison and a $250,000 non-dischargeable fine. Therefore, every act that violates a bankruptcy law could result in a separate criminal charge. For example, if you transferred an asset to a friend or family member and then contacted them to tell them what to say because you’re being investigated, that’s considered witness tampering. If you threaten that person to prevent them from testifying or cooperating in the investigation, the maximum penalty is 20 years in prison and 30 years if physical force was used. Destroying evidence or documents relevant to the investigation also carries a maximum prison sentence of 20 years.
If you’re charged and convicted of bankruptcy fraud, even if you don’t serve prison time, a felony conviction will still result in serious consequences. For example, certain states don’t allow convicted felons to own guns/firearms. A U.S. passport will be revoked during the time you’re in prison or on probation, and other countries may have a travel ban for convicted felons. Visas can also be revoked and permanent residents may face deportation. You could even lose parental rights such as custody or visitation because of a felony conviction and employers may avoid hiring you. Government benefits such as public housing, food stamps, and Supplemental Social Security Income (SSSI) could also be denied.
When filing for bankruptcy, you must list all your assets and liabilities. Failure to do so could result in violations of bankruptcy laws and serious consequences, whether it’s civil or criminal fraud. Because the bankruptcy process can be confusing, if there is any doubt as to what information should be included in the bankruptcy forms to avoid fraud, you should seek the legal advice of an experienced attorney.