What is bankruptcy fraud?

Bankruptcy fraud is a broad term that describes a variety of actions that filers sometimes take to get an unfair advantage. Depending on what form that fraud takes, it’s considered a crime and is punishable by up to 5 years in federal prison and a (non-dischargeable) fine of up to $250,000.

A quick note about intent

Generally speaking, a crime such as bankruptcy fraud requires that the person intended to do something wrong. However, you will see that some of the scenarios that can be considered bankruptcy fraud are things that can easily happen by accident. Make sure you’re diligent in the preparation of your bankruptcy forms, and, when in doubt, disclose information. You’re not going to get thrown in jail for accidentally forgetting to list an asset. But, if you intentionally submit incomplete paperwork, and you’re not forthcoming with information even when the trustee asks for it, you can easily cross the line and end up doing more harm than good for your financial future. Because you can be accused of fraud even if you didn’t intend to misstep, it’s important to present a complete financial picture to the court. That way, you can’t be accused of intentionally withholding information.

Hiding property you own

One of the most common forms of bankruptcy fraud involves accusations that filers are hiding assets from the court. As part of the Chapter 7 bankruptcy process, the United States Trustee appoints a bankruptcy trustee who is empowered to sell the filer’s non-exempt assets to partially repay the filer’s outstanding debts. As a result, filers are required to list all of their property in their bankruptcy filing, including every tangible and intangible asset that they have a legal interest in, regardless of whether that asset was a gift, inherited, won, or paid for.

If you don’t disclose a specific asset in your bankruptcy schedules, it can’t be exempted, leaving it at risk of being sold by the bankruptcy trustee assigned to your case, even if it would otherwise have been protected. Additionally, you could be accused of knowingly engaging in concealment of assets. When you list your property for the court, you do so under the pain and penalty of perjury. Meaning that if you intentionally lie and knowingly submit incomplete or inaccurate information, you could face serious consequences.

Hiding the value of property you own

Note that intentionally undervaluing your asset is also considered a type of bankruptcy fraud. If your paperwork or a trustee asks you to report the value of an asset, don’t knowingly give false statements or otherwise intentionally undervalue a piece of property you know is worth more. This doesn’t mean that you should stress about figuring out yard sale values for your clothes or furniture. But, you should not list your “coffee maker” with a $20 value when it’s really a state-of-the-art espresso machine that you could sell for $600. 

So, I didn’t fill out my forms right. What’s the crime here? 

A U.S. Attorney is not going to charge you with bankruptcy fraud for “improperly filling out paperwork.” But, a U.S. attorney can initiate a criminal investigation for perjury. Perjury is essentially the crime of lying under oath. If you accidentally submit incomplete or inaccurate information on your bankruptcy petition and you don’t take steps to correct the misinformation once it’s been brought to your attention, the Department of Justice can charge you with the bankruptcy crime of perjury. Of course, the same is true if you intentionally submit incomplete or inaccurate information. In that case, depending on the circumstances, amending your forms may not be enough to escape the consequences of trying to hide something.

Disposing of property to hide it from your creditors

Before you file for Chapter 7 or Chapter 13 bankruptcy, you need to be careful not to behave in ways that the bankruptcy court would view as suspicious. Your bankruptcy case can be impacted by actions you take before you file bankruptcy. Pre-bankruptcy actions such as transferring valuable assets to another’s ownership, gifting valuable property to others, and even selling certain property can be a fraudulent transfer under the Bankruptcy Code. If you have made significant changes to your holdings prior to initiating a bankruptcy proceeding, make sure to disclose those activities. Otherwise, it may seem that you’re trying to hide these actions from your trustee in violation of federal law. This kind of perjury could not only jeopardize the success of your bankruptcy, it could be interpreted as a fraud scheme. Depending on the circumstances, your trustee could opt to alert law enforcement in addition to undoing the transfer or gift and selling the property anyway.

Taking on debt without ever planning on paying it back

The bankruptcy system is designed to help those in need of debt relief who would pay their debts back per the terms of their original lending agreements if they could. Chapter 7 bankruptcy initiates an automatic stay and then eliminates the eligible debts of low-income filers. Chapter 13 bankruptcy initiates an automatic stay and then reorganizes a filer’s debts to make repayment more manageable over time. Filing bankruptcy is not meant to shield those who knowingly take out debt without any intention of paying it back. If a creditor believes that you have acted in bad faith in this way, they may hire a bankruptcy attorney to file an objection to discharge on their behalf. This action could lead your creditor(s) to ask the court to block your access to debt relief and lead a United States Attorney to accuse you of white collar crime. Be prepared to explain why you took out lines of credit (especially any accounts opened in the year or so before you filed for bankruptcy) if you were unsure of how you’d pay your creditors back successfully.   

Conclusion

It’s critically important that you remain focused and pay attention to details when filling out your bankruptcy petition and when answering questions from your trustee. When in doubt, disclose information. You can do much more harm to your case (and to your future) by holding back than you can by being forthcoming.