What Is Bankruptcy Fraud?

Federal bankruptcy proceedings provide a framework for those who are heavily burdened by debt to get financial relief. There are honest and legitimate reasons as to why someone might need their slate wiped clean. However, in the United States, about 10 percent of bankruptcy filings involve fraudulent claims. Read on to learn how someone might use bankruptcy fraud to their economic advantage and what the consequences of this crime consist of. 

What is bankruptcy?

Bankruptcy is a federal legal process for helping people who can no longer pay their creditors. It is designed to help individuals, corporations or other entities eliminate all or part of their debt or help them repay a portion of what they owe. When done correctly, bankruptcy provides debtors a financial “fresh start” to those who are struggling from burdensome debts. 

The Supreme Court describes the purpose of bankruptcy law as “a chance to give to the honest but unfortunate debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”

Basically, bankruptcy laws exist to relieve people of debt and protect financially troubled businesses. However, not all debts can be wiped completely clean. For example, most student loan debt, court-ordered alimony, government fines and penalties, and federal tax lien for taxes owed to the U.S. government cannot be eliminated through filing for bankruptcy. 

Despite this, there are many different types of bankruptcies, which are often referred to by their chapter in the U.S. Bankruptcy Code. It may sound too good to be true, but filing for bankruptcy is also not without long-term consequences. Some consequences may include loss of real estate, vehicles, and possessions as well as negatively affecting your credit report. Depending on the type of bankruptcy you file, bankruptcies can remain on your credit report for about a decade. 

Bankruptcy can be a complex process, and bankruptcy fraud is a serious felony that happens when a debtor intentionally disregards the rules and regulations governing bankruptcy proceedings.

What is bankruptcy fraud?

When you file for bankruptcy, you are essentially reporting your income, assets, and all your debts in exchange for having your debts discharged or eliminated. This transparent process requires you to fully disclose all your assets and recent asset transfers.

Bankruptcy fraud is a broad term for any action that involves debtors deliberately lying or misrepresenting information when filing for bankruptcy. Frequently, bankruptcy fraud is committed alongside other crimes, such as mortgage fraud, identity theft or money laundering. 

This serious white-collar crime can take on many forms, but the most common fraud involves knowingly concealing assets from the courts to avoid having to forfeit them. Nearly 70% of all bankruptcy fraud involves the concealment of assets. This can include transferring assets into someone else’s name, lying about owning assets, or creating fake liens or mortgages to make the assets seem like they have no value. People committing bankruptcy fraud do this because creditors can only retrieve assets that have been listed by the debtor during the bankruptcy process. 

In addition to concealing or transferring financial assets, below are some other scenarios under the bankruptcy fraud umbrella:

  • Intentionally providing false information or filing incomplete forms.
  • Filing for bankruptcy multiple times, using either false or real information, in several different locations or jurisdictions.
  • Bribing a court-appointed trustee.  
  • Knowingly running up credit card bills with no intention of paying them off (also known as “credit card bust-outs”).

What are the consequences of bankruptcy fraud?

The U.S. Trustee Program, part of the Department of Justice, oversees the bankruptcy system. If there is suspicion of fraud, the U.S. Trustee Program refers the information to the FBI and U.S. Attorney’s Office. A case is then opened if warranted and interviews begin as well as a review of financial documents. 

There are serious legal and federal penalties for those who are charged with bankruptcy fraud. In fact, bankruptcy fraud carries a sentence of up to five years in federal prison, or a fine of up to $250,000, or both. Even those who simply attempt to commit bankruptcy fraud may be punishable by law.

However, proving fraud, and especially the intent of fraud, can be a difficult process. For almost all bankruptcy crimes, the government has to resolve two questions:

  1. Did the defendant misrepresent important facts?
  2. Did the defendant intend to deceive, hinder, or delay the court or the creditors?

Legal resources for bankruptcy: we’re here to help 

All in all, bankruptcies can be a messy situation, whether you’re filing for bankruptcy or being accused of bankruptcy fraud. Working with our attorneys at the Law Offices of Robert J. DeGroot can help ensure your bankruptcy proceedings go as smoothly as possible.

If you are being investigated for bankruptcy fraud or facing charges, reach out to our attorneys at the Law Offices of Robert J. DeGroot today. You deserve legal counsel that is experienced, effective, and professional. 

Contact the Law Offices of Robert J. DeGroot today for your confidential consultation!