Being convicted of bankruptcy fraud can come with serious consequences, so it is important to be truthful and cautious in all steps.
For many people, filing for bankruptcy is the best route to improving their finances and getting out of debt they may never be able to pay off. The government offers this option as a way to provide relief for those who need it. However, others will take advantage of this ability and may lie in order to remove their debts or exploit those who need the help.
For individuals, there are two general forms of bankruptcy available through the federal government. Some people qualify for a Chapter 7 bankruptcy, which wipes out all consumer and medical debt entirely. For those who do not meet the income limits of Chapter 7, a Chapter 13 allows for an interest-free payback plan for all or some of their debt. These programs come with restrictions and impacts to your credit score, but for many, that cost is worth the relief.
As a part of this process, any creditors involved with that individual have a cost associated with the loss of repayment. Bankruptcy laws are designed to mitigate this loss by giving them a share of your non-essential assets when they wipe out debt. During filing, you would disclose all property you own and asset transfers, with certain things being exempt in order to maintain your job and home.
In a Chapter 7 bankruptcy, all non-exempt property is sold, and the proceeds are distributed to your creditors. In a Chapter 13, the value of that property is a part of the payment plan. Your creditors are owed these amounts, and any attempt to hide assets or otherwise defraud a creditor is considered fraudulent.
Any type of bankruptcy will involve a trustee, a court-appointed individual who is considered the representative of a debtor’s estate during proceedings. The trustee will evaluate and make recommendations about various debtor requests and distribute funds in accordance with the United States Bankruptcy Code.
Not all bankruptcy fraud happens once the filing begins- rather, some people use bankruptcy as a way to cover up prior fraud. For example, if you obtained credit under false pretenses like misrepresenting your income and assets, or you falsified financial documents to obtain credit, this debt is not likely to be discharged as part of a bankruptcy. The law is designed to help people who were harmed by debt, not those who caused harm to creditors.
Other examples of fraud that can nullify a bankruptcy include purchasing items on credit with no intention of paying off the debt, buying large amounts of goods right before filing bankruptcy, knowingly writing bad checks, or engaging in deceptive business practices.
Another common example is called a petition mill, in which someone repeatedly takes on debt and files bankruptcy in multiple people’s names.
When filing for bankruptcy, most people do their best to report all assets and income in a transparent manner. However, it can be tempting to hide property, and when this is acted on, it can be bankruptcy fraud. Some examples of fraud during the filing process include:
Other forms of bankruptcy fraud can include filing for multiple bankruptcies without waiting the appropriate period of time or in multiple states.
For any of these items to be classified as fraud, it has to be proven that you both knowingly and intentionally committed the act. Forgetting to list a piece of jewelry on your paperwork is not considered fraud unless you did so with the intention of retaining it without the trustee’s knowledge. However, failing to list a second property in hopes of keeping it would be fraud.
Bankruptcy fraud can be both a civil and a criminal charge, depending on who is filing the lawsuit.
When a creditor files a lawsuit to allege wrongdoing regarding a specific debt, this is a civil case. From there, the case can either be dismissed, the discharge of debt can be denied, or other sanctions can be imposed. Civil cases are very common in presumptive fraud, such as when a person racks up debt right before filing for bankruptcy.
When there is a larger scheme meant to deprive multiple creditors, this is more likely to be considered criminal bankruptcy fraud. Federal law dictates that these cases are investigated by the Federal Bureau of Investigation (FBI) and then prosecuted by the U.S. Department of Justice (DOJ). The majority of these cases will be filed against debtors themselves, though they can also be applied to creditors, trustees, court personnel, and third parties who are found to be part of these schemes.
Criminal cases often include other charges that go along with bankruptcy fraud. For example, someone who fails to list an asset on their bankruptcy schedules and attends their hearings can be accused of perjury. Many prosecutions lead to charges for tax fraud, wire fraud, money laundering, identity theft, conspiracy, or bribery.
In the case of a civil suit, the outcome will typically determine whether the debt is still owed or not. There could be other restrictions placed surrounding future debt or repayment of losses, but the consequences are financial in nature.
For criminal cases, the penalties can be harsh as the federal government takes any form of fraud seriously. Anyone who knowingly makes a false statement in association with filing for bankruptcy can face fines up to $250,000 and up to 20 years imprisonment. They may also be ordered to pay restitution, perform community service, or be under probation for a period of time.
If you have been accused of bankruptcy fraud, it is important that you find a skilled lawyer who understands the financial laws and statutes. This will be a different attorney than the one you retained to help you file your bankruptcy initially.
A lawyer skilled in bankruptcy law will be able to review your documents to determine the best defense in your case. If possible, based on this review, they will argue that you did not commit any fraud and that all of your financial information is true as it was reported. However, even if there is a demonstrable omission or misrepresentation, an attorney will be able to work with you.
Because fraud requires both knowledge and intent, the prosecution will have to prove that you had both. If you can demonstrate that any discrepancies were honest mistakes or that you did not understand the process, this is the best defense.
You should always be honest with your lawyer in initial private discussions so that they can evaluate all relevant information and law to craft the most solid possible defense.