Fraud cases are quite common. Some of the higher-profile examples include Real Housewives of New Jersey stars Christopher Laurita and Teresa Giudice. Mr. Laurita misled the court concerning a 2010 lawsuit against his apparel firm; Ms. Giudice served a year in prison because she did not disclose her TV show income on her bankruptcy petition.
Fraud is not just making a math mistake or accidentally omitting a debt or asset. These things happen. Rather, fraud is intentionally doing these things.
Bankruptcy fraud penalties are severe and vary by state. Generally, if the trustee uncovers bankruptcy fraud and proves it in court, the judge will dismiss the debtor’s Chapter 7 or other type of bankruptcy petition and also sentence the debtor to jail time.
Most fraud cases settle out of court. Typically, the trustee (person who oversees the bankruptcy for the judge) and debtor’s attorney agree as to a disposition. That could be a suspension of the Automatic Stay or perhaps a shorter sentence. If the case goes to trial, the trustee must prove fraud.
This article covers the different instances that can lead to fraud. Being aware of them ahead of time can help you avoid headaches down the line.
In This Article, we’ll cover:
Credit Card Fraud
Bankruptcy in Multiple States
Using Another Name on Your Petition
Pre-Payment of Debts
Most bankruptcy fraud cases involve one of the following situations. Fraud is easier to prove if the disputed transaction occurs within ninety days of the bankruptcy filing. In these situations, the Bankruptcy Code fraud presumption applies. So, it’s harder for a debtor’s attorney to prove that the transaction was either accidental or honest.
Schedule A, which lists the bankruptcy petitioner’s assets, is very detailed. To avoid fraud allegations, many debtors make generalized reports whenever possible. For example, rather than listing all household items and valuing each one, a debtor might simply list “household goods” and assign an overall value.
But this method does not work for large assets, like houses and vehicles. It’s very hard to convince a judge or a trustee that the debtor “accidentally” forgot to list a residence or a car.
In the old days, many people “sold” assets to friends or relatives for practically nothing and then bought these assets back after the bankruptcy ended. This technique was especially common for nonexempt assets, such as vacation homes and boats.
This technique rarely works today. Trustees have plenty of time and resources to track down these transfers and evaluate them. Unless the transaction was at or near market value, trustees usually at least threaten to file fraud charges. As mentioned, these kinds of cases are easier to prove if the transfer occurred shortly before the bankruptcy filing.↑ Back to top
Asset concealing and some other fraud allegations are difficult to defend. But undervaluing claims are normally easier to defend, if the debtor has sufficient evidence to justify the assigned value in Schedule A.
A primary residence is a good example. Assume the local tax assessor’s website, which is the baseline value in these cases, says the debtor’s house is worth $200,000. However, if the debtor uses that value, the house would not be exempt under the applicable exemption law. The debtor has some options in this case.
One involves the IRS Quick Sale Value tool. In delinquent tax cases, the QSV is 80 percent of the fair market value. If the owner wants to dispose of any asset quickly, the owner must discount the price.
Another option involves home investor offers. Typically, a home investor offers a maximum 60 percent of the fair market value in these transactions. That’s because the buyer bears all the risks of improving the property and making any necessary repairs. Actually, in many cases, the initial offer is much lower than six cents on the dollar.
To justify the different value in Schedule A, an attorney probably needs a written offer from a home investor that is no more than ninety days old.↑ Back to top
Credit Card Fraud
Aside from concealing assets, credit card fraud may be the most common type of bankruptcy fraud allegations. Indeed, lawmakers added the means test to the Bankruptcy Code specifically to combat this kind of fraud.
There is a perception among some people, mostly credit card companies, that some debtors use their credit cards to purchase luxury items and then declare bankruptcy to avoid paying the bill. In other words, they never really intended to repay the money they borrowed. That’s the essence of bankruptcy fraud. So, under the means test, Chapter 7 debtors must have incomes below the state average for their family sizes.
If the debtor used a credit card to pay for a luxury item inside the 90-day fraud presumption window, these cases are relatively easy to prove.
Furthermore, the trustee may not have to work very hard to obtain the evidence required. Debtors are required to list some of these transactions in the Statement of Financial Affairs. The SOFA contains details about the debtor’s financial past. In other cases, the trustee may simply review prior credit card statements.
If the disputed transaction occurred outside the fraud presumption window, the trustee must establish both the purchase and the intent to defraud the bankruptcy court. If the debtor made any card payments since the purchase, intent is difficult to prove.↑ Back to top
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Filing Bankruptcy in Multiple States
This type of fraud, and the next subject on this list, usually involve attempts to get around the serial filer rule. Generally, if a court has involuntarily dismissed one or more petitions in the last year, the Automatic Stay is either inapplicable or limited.
In many cases, an attorney can file a motion to extend the stay. If there was a good reason for the dismissal, the judge may grant the motion and extend, or reinstate, the Automatic Stay.
Many people relocate across state lines to file bankruptcy in another state. Others use a friend or relative’s out-of-state address. This technique used to work pretty well. But today, bankruptcy petitions are stored in a nationwide computer database. So, although it may take the trustee a while to uncover this type of fraud, they usually will.
Additionally, these kinds of fraud cases are almost impossible to defend. False information on the petition always falls inside the fraud presumption window. Additionally, even if the presumption does not apply, most judges will not believe that the debtor “accidentally” listed the wrong address.↑ Back to top
Using Another Name on the Petition
This type of bankruptcy fraud usually carries the stiffest penalties. If the debtor used a false name on the petition, the debtor often knew the system well and also thought s/he knew how to beat it.
Trustees are especially on the lookout if a state has a strong tenancy of the entirety rule. This rule says that spouse each have claim to an entire piece of property -- instead of only their half of the property. If the property title includes a tenancy of the entirety, this means that creditors can’t seize the asset of one owner to pay the debts of another owner. So, if Mike and Joan’s residence is a tenancy of the entirety, creditors cannot take the house to pay Mike’s debts.
Let’s stay with this example for a moment. . .
Assume Mike files for bankruptcy, but he fails to follow court orders, and the judge dismisses his petition.
If he filed again, the Automatic Stay may not apply, as discussed above. So, Joan files bankruptcy instead. The Automatic Stay is in full force and effect, and their house is safe. But! If the court determines that Joan filed bankruptcy primarily to evade the serial filer rule, Mike and Joan are in big trouble.↑ Back to top
Pre-Payment of Debts (aka Creditor Preference)
Many states have limited cash exemptions. So, if the debtor has a savings account, the trustee may try to seize it. The same thing applies if the debtor recently received a windfall, like a tax return.
To conceal the nonexempt cash, some debtors make multiple payments on secured debts, such as home mortgages or vehicle loans. Many people do not see this action as fraudulent. After all, they reason, they must make the installment payment eventually. If anything, they further reason, they are doing the creditor a favor by prepaying the obligation.
But the bankruptcy court sees these prepayments in a much different light. In section 6 of the Statement of Financial Affairs, debtors must list must list each creditor who received at least $6,225 in the ninety days preceding bankruptcy. Any transfers over the limit are a “creditor preference” under the Bankruptcy Code.
This law contains an anti-discrimination provision. All creditors must receive the same treatment, especially inside the fraud presumption window.
An attorney may be able to beat these charges if the debtor had little or no savings. But the fraud presumption is difficult to overcome.↑ Back to top
The b-word sometimes means giving money to a bankruptcy trustee or other court official in exchange for preferential treatment. But bribery has a much broader meaning, at least in some respects. Any gift to any court official which is more than de minimis could be considered bribery. That includes things like taking the trustee to lunch after a 341 meeting.
Lack of exchange is sometimes a defense to any bribery charges, inside or outside of bankruptcy. For example, Mike LLC might make large campaign contributions to a bankruptcy judge in the hope of obtaining preferential treatment.↑ Back to top
As you can see, bankruptcy fraud is not always cut and dry. It’s also not something to worry about if you’re approaching your case in good faith.The best bet is to be as honest as possible. Not providing the most accurate snapshot of your current circumstances or not giving the court a complete picture can cause problems down the road.
The good news? You’d likely know if you had committed some type of fraud. Again, it is something that you’ve done intentionally. Mistakes happen and as long as you’re doing your best to be as upfront as possible, you should be fine.↑ Back to top