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What is Bankruptcy Fraud?

bankruptcy_51920013 What is bankruptcy fraud

What is bankruptcy fraud?

The definition of bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). The majority of people who do file for bankruptcy are transparent when reporting all assets. However, in some cases yielding to the impulse to hide property can result in the accusation of bankruptcy fraud.

Bankruptcy fraud is a white-collar crime that can take on many forms and it doesn't happen by accident or mistake. Fraud committed intentionally during bankruptcy proceedings are:

  • failing to list an asset on the appropriate bankruptcy schedule to prevent it from being sold for the benefit of creditors
  • concealing a property transfer that occurred before the bankruptcy (for example, failing to disclose gifting a car to a friend)
  • providing a false document to the bankruptcy court or trustee
  • destroying or withholding documents
  • knowingly making a false statement in the bankruptcy paperwork or to the bankruptcy trustee at the 341 meeting of creditors, or
  • paying someone to help hide property from the court.

Accidentally forgetting to list an asset or incorrectly stating your income or expenses probably wouldn't rise to the level of fraud. Nonetheless, if you failed to list your vacation home in your bankruptcy paperwork, hoping that the trustee wouldn't find out about it, it's likely you've knowingly and intentionally done the following: hidden an asset, filed a false form, and committed perjury.

Civil and Criminal Bankruptcy Fraud 
Since not all fraud is the same, the severity of the consequences for civil versus criminal fraud differs quite substantially. 

1- Civil Bankruptcy Fraud

Civil cases usually arise when a creditor files a lawsuit alleging wrongdoing involving one particular debt. If the creditor proves its case, the filer will face a variety of consequences. For instance, the court can do one or more of the following:

  • dismiss the case and prohibit another filing for a period
  • deny the discharge of the debt (the debtor remains responsible for paying it), or
  • impose some other sanction.

2- Criminal Bankruptcy Fraud

Scheming to deprive multiple creditors would be more likely to rise to the level of criminal bankruptcy fraud. Under federal law, cases of criminal fraud are investigated by the Federal Bureau of Investigation (F.B.I.) and aggressively prosecuted by the U.S. Department of Justice (D.O.J.). Although the bulk of the crimes apply to debtor activities (the person who files the case), creditors, bankruptcy trustees, court personnel, and third parties can also be convicted of bankruptcy crimes.

Also, many types of dishonesty are often involved in criminal bankruptcy fraud, some of which are also crimes. You'll find most bankruptcy crimes in federal criminal statutes. (18 U.S.C. §§ 152, 157.) Here are some examples:

Concealing Assets
  • failing to disclose a property transfer that took place before filing the case
  • failing to disclose assets in the bankruptcy paperwork, and
  • enlisting someone's help to hide property.
Concealing and Falsifying Information
  • filing a false or incomplete bankruptcy form, and
  • destroying or hiding records.
Identity Issues and Unauthorized Filings
  • filing a bankruptcy case using false identity information
  • filing multiple bankruptcies in different jurisdictions, with or with property identification, and
  • filing a bankruptcy case on another's behalf without authorization.
Bribery and Embezzlement
  • bribing a trustee or court official, and
  • embezzling funds from a bankruptcy estate.

Along with bankruptcy fraud, federal prosecutors often add counts for other federal crimes. For instance, the D.O.J. might prosecute someone for perjury who fails to list an asset on bankruptcy schedules. Also, prosecutions often include tax fraud, wire fraud, mail fraud, money laundering, bank fraud, identity theft, or conspiracy, each of which brings separate penalties.

The consequences of engaging in criminal bankruptcy fraud can be harsh. Anyone who makes a knowingly false statement in association with a bankruptcy filing can be assessed fines up to $250,000 and receive up to 20 years in prison. 

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