3 Things to Know About Bankruptcy Fraud

Filing for bankruptcy should pave the way to a fresh start, but the possibility of bankruptcy fraud dramatically clouds the path toward financial freedom and can allow the debtor’s creditors to recover assets that may have been retained. Read below to discover three essential aspects of bankruptcy fraud and connect with Ritter Spencer Cheng to work with bankruptcy experts.

Defining Bankruptcy Fraud

Bankruptcy fraud occurs when a debtor is dishonest in the information provided in court to avoid losing assets. The court appoints a trustee who governs the bankruptcy estate created when debtors file bankruptcy and claim they can’t afford what they owe. In order to be convicted of fraud, debtors must have intentionally concealed part of their estate during the pending bankruptcy process. Of course, no one admits to deliberately concealing assets, so being forgetful or not thorough can lead to time and money spent in explaining the concealment. Thorough, honest and complete disclosure avoids this problem. Understanding the seriousness of bankruptcy fraud and what to avoid is crucial when business owners file for bankruptcy.

Concealment of Assets: The Most Common Form of Bankruptcy Fraud

The most common form of bankruptcy fraud is the conscious concealment of assets; innocent forgetfulness doesn’t constitute fraud, but intentionally hiding an asset does. Other forms of concealment include:

  • Hiding transfers of assets to an individual or company before filing bankruptcy
  • Providing false documentation of assets
  • Destroying documentation altogether 
  • Paying others to help conceal assets

Debtors who hide their assets to avoid handing them over to the trustee are committing fraud. Their creditors are entitled to listed, non-exempt assets, so they won’t receive a full payment if the debtor conceals assets that could be used to pay the debts. Concealing assets may lead to serious legal trouble, including loss of assets, hefty fines and time in federal prison.

In addition to facing criminal charges, debtors can expect to see their debt discharge revoked or denied, meaning they will still be responsible for paying the creditors. In this case, the debtors can not use the discharge debts in future bankruptcy cases. It’s important to have a basic understanding of bankruptcy law before filing to avoid potential legal difficulties. 

Fraud Can Occur Before Bankruptcy is Declared

Debtors who attempt to hide their assets before filing for bankruptcy can still be liable for criminal charges. Examples of this type of deception include using a credit card with the intention never to pay it off, purchasing luxury goods one can’t afford, emptying a 401k, or writing a bad check and then declaring bankruptcy.

If a debtor attempts to empty their savings before declaring bankruptcy, the trustee can obtain the money for the creditor using the “clawback provision.” Forms of spending that qualify for this provision include large money transfers that make one indebted, incurring debt to become insolvent, and preferential transfers to certain creditors. 

Instead of trying to save assets by committing fraud, consider hiring a bankruptcy lawyer before declaring bankruptcy to avoid legal troubles. 

Petition Mills

Bankruptcy fraud schemes make financial strain even more difficult for debtors who face losing their homes. Someone who is in the position of owing large sums of money should keep an eye out for petition mills, which are becoming increasingly common as a type of bankruptcy fraud scheme in the United States.

In this scenario, the offender poses as a financial advisor who will work with the victim’s landlord or other creditors to help them avoid eviction, defaults, or lawsuits. Instead of contacting the landlord or creditors, though, the perpetrator takes the personal identifying information of the tenant and files for bankruptcy. They tell the victim that the eviction process and reaching resolution will take a long time, all while secretly following bankruptcy proceedings. They collect money from the resident during this time, leaving them with a drained bank account and destroyed credit and business relations. 

Other types of schemes include multiple-filing schemes and bust-out schemes. Multiple-filing methods are similar to the concealment of assets; debtors don’t list all of their assets in this fraudulent act. However, in a multiple-filing scheme, the debtor repeats the process in different states using their name or that of an unknowing victim. 

A bust-out plan involves an individual who applies for as much credit as possible, then applies for bankruptcy without paying out any of their accounts. This action often results in the debtor being denied a discharge meaning that the individual will lose whatever non-exempt property he has, and still be on the hook for damages for multiple years.

Committing bankruptcy fraud always leaves the debtor in a worse financial position with potential criminal charges. While intention matters, the best way to avoid liability or being found guilty for bankruptcy fraud is to avoid any activities that could possibly be perceived as fraudulent or questionable. Are you a business owner who needs assistance in restructuring business debts or filing for bankruptcy and understanding all of the rules? Contact Ritter Spencer Cheng, a Texas bankruptcy law firm, to make sure that you do things the right way.