What Is Bankruptcy Fraud?

What Is Bankruptcy Fraud?

Bankruptcy fraud happens when someone lies or hides important information during the bankruptcy process. This can include things like:

• Hiding property you own or not listing all your assets

• Intentionally undervaluing property you own

• Transferring property to someone else to keep it out of your case

• Taking on debt with no intention of paying it back

The key difference between a mistake and fraud is intent. If you make an honest mistake on your forms and fix it when it’s pointed out, it’s not fraud. But if you knowingly leave out information, mislead the court, or try to game the system, you could be accused of committing bankruptcy fraud, and that can lead to serious consequences.

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.

This is why it's important to be thorough when filling out your bankruptcy forms. Double-check the information before you file. 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 may find yourself in trouble.

Hiding Property

One of the most common types of bankruptcy fraud involves hiding property from the court. In a Chapter 7 case, a bankruptcy trustee is assigned to review your assets and may sell any non-exempt property to help pay your creditors. That’s why it’s so important to list everything you own on your bankruptcy forms — even if the item was a gift, something you inherited, or something you didn’t pay for.

If you leave something off your forms, the court can’t protect it with an exemption. That means the trustee might be allowed to sell it, even if you could have kept it by listing it properly. Worse, if it looks like you left it off on purpose, you could be accused of trying to hide assets, which is a serious form of bankruptcy fraud.

When you submit your bankruptcy paperwork, you're doing so under oath. That means you're swearing that everything you report is true and complete. If you knowingly lie or leave something out, you could face penalties, including losing your property or even facing criminal charges.

Understating the Value of Property

Intentionally undervaluing your property can also be considered bankruptcy fraud. When you fill out your bankruptcy forms or answer questions from the trustee, you're required to give honest estimates of what your property is worth.

That doesn’t mean you need to stress about getting exact values for every little thing — it's fine to estimate based on yard sale or secondhand prices for everyday items like clothes or used furniture. But you shouldn’t list a high-value item as something cheap. For example, don’t list a $600 espresso machine as a $20 coffee maker just to try to keep it.

If the court believes you’ve knowingly undervalued something to mislead the trustee, that could raise red flags and lead to serious consequences. When in doubt, it’s better to give an honest estimate than to risk being accused of hiding the true value of what you own.

Transferring or Disposing of Property

The bankruptcy court doesn’t just look at your financial situation on the day you file. It also looks at what you did in the months leading up to your filing. If you sell, give away, or transfer valuable property before filing bankruptcy, the court may view those actions as suspicious.

For example, if you transfer ownership of a car to a friend or give expensive items to family members right before filing, the trustee might see this as an attempt to keep assets out of your case. Even if you didn’t mean to hide anything, not disclosing these transfers could raise serious concerns and be treated as fraudulent transfers under the Bankruptcy Code.

If you’ve made any significant changes to your finances or property before filing, it’s important to disclose them. Being honest gives the trustee a clear picture and helps you avoid accusations of fraud. In some cases, the trustee may reverse the transfer and bring the property back into your case. If it looks like you tried to mislead the court, they could refer your case for further investigation.

Taking on Debt You Don't Plan To Pay Back

Bankruptcy is meant to help people who truly need relief from debt — not those who borrow money with no intention of paying it back. If it looks like you took on debt right before filing bankruptcy without a plan to repay it, the court and your creditors may question your intentions.

For example, if you opened new credit cards, maxed out existing ones, or took out personal loans just before filing, that could raise red flags. Creditors may argue that you acted in bad faith and ask the court to stop those debts from being wiped out in your case. In more serious situations, this kind of behavior could lead to a fraud investigation.

If you’ve used credit recently and are thinking about filing for bankruptcy, be ready to explain why. Showing that you were trying to keep up or that your situation changed unexpectedly, like a job loss or medical emergency, can make a difference. Being upfront and honest helps you avoid unnecessary trouble with the court and your creditors.

Civil vs. Criminal Bankruptcy Fraud: What's the Difference?

Not all bankruptcy fraud is treated the same way. Some actions may lead to civil penalties, while others can lead to criminal charges.

• Civil bankruptcy fraud doesn’t result in jail time, but it can still have serious consequences. For example, the court might take away exemptions that would have protected your property, dismiss your case, or prevent you from filing again for a certain period of time.

• Criminal bankruptcy fraud is much more serious. If the court believes you acted on purpose to lie or cheat the system — like by hiding assets or committing perjury — you could face criminal charges, large fines, or even time in federal prison.

Whether something is treated as civil or criminal fraud often depends on your intent and the facts of the case.

How Is Bankruptcy Fraud Discovered?

Bankruptcy fraud can come to light in several ways. Sometimes, it’s reported by people who know the filer, like an ex-spouse, business partner, or coworker. Other times, a creditor notices something unusual and alerts the court.

Bankruptcy trustees are also trained to look for red flags. They review your paperwork, ask questions at the 341 meeting of creditors, and may check public records or use private investigators to verify your financial details.

If fraud is suspected, the trustee can refer your case to the U.S. Trustee’s Office for further investigation. From there, serious cases may be handed over to federal agencies like the FBI or the Department of Justice.

What Are the Penalties and Long‑Term Consequences of Fraud Charges?

If the government pursues criminal charges for bankruptcy fraud, the penalties can be severe. A conviction for bankruptcy fraud can carry up to five years in federal prison and a fine up to $250,000 for each offense. Those fines are not dischargeable in bankruptcy.

Other related crimes often carry their own penalties:

• Perjury (lying under oath): Each act can carry up to five years in prison and fines.

• Witness tampering can carry up to 20 years in prison (and up to 30 years if physical force is used).

• Destroying or concealing evidence can carry up to 20 years in prison.

Because each act can be charged separately, a single case can result in multiple criminal counts and add up to much higher total exposure.

Beyond prison time and fines, a felony conviction can cause long-term collateral harm that touches many parts of life. Examples include:

• Losing the right to possess firearms while convicted or on probation

• Passport revocation while incarcerated or on probation, visa or travel problems, and possible immigration consequences for non‑citizens

• Harder time finding housing or qualifying for public benefits (like public housing or certain assistance programs)

• Trouble getting some jobs or professional licenses

• Damage to custody or visitation rights in family court

Let's Summarize...

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.