Jun 9, 2023 • Steve C. Taylor, Esq.
The Oxford Languages Dictionary defines FRAUD as “wrongful or criminal deception intended to result in financial or personal gain.”
Bankruptcy fraud is defined as a white-collar crime that involves intentionally deceiving the bankruptcy court or creditors during the bankruptcy process.
If you are charged with bankruptcy fraud by the U.S. Department of Justice, you could face $250,000 in fines, which are not dischargeable debt, and up to five years in federal prison. These laws are part of the Bankruptcy Code, 18 U.S.C.
Law enforcement officials will arrest you for these criminal charges, and your case will then be under review by the U.S. Attorney’s Office. During a full criminal investigation, the U.S. Attorney’s Office will review your history for possible additional financial crimes — any further hiding or lying could lead to perjury charges.
Making an honest mistake can happen, and you will usually be given the opportunity to correct your error. There are many ways someone can commit fraud during their bankruptcy filing, and it will be up to your attorney to prove your intent was not to commit fraud.
Avoid Common Mistakes
It is always better to be safe than sorry. You can avoid common mistakes by:
- Completing paperwork and requests from your bankruptcy trustee on time.
- Hiring a bankruptcy attorney to complete documents and forms.
- Disclosing all assets and accounts. When in doubt, ask your attorney or trustee about the asset in question.
- Double-checking that you and/or your attorney have completed all fields on a form.
Common Types of Bankruptcy Fraud
Common types of bankruptcy fraud involve a bankruptcy filer:
- Hiding accounts or property, or hiding the real value of assets – Concealment of Assets
- Lying about money or property on your bankruptcy petition – False Statements or Perjury
- Transferring money to friends or family or hiding it in cash – Money Laundering
- Taking on debt and filing bankruptcy over and over – Petition Mills
Reasons Why Bankruptcy Filers Hide Assets
When people are initially facing bankruptcy, they are usually entering unknown and terrifying territory. The desire to keep your home or car is understandable. But the hiding of these assets is not the way to go. It is relatively easy for your bankruptcy trustee to find them. The U.S. Trustee Program (USTP) was created to review your case and assets to develop a fair debt repayment and debt dismissal plan.
For a better understanding, let’s start at the beginning. During a Chapter 7 bankruptcy, your secured debt, that is debt for property like a house or a car, can be paid off with seized assets. Your case assigned bankruptcy trustee’s primary job is determine what, if anything, should be taken and sold to cover your debts. States have exemptions from what can be seized, and in most cases, you will be allowed to keep a reasonably priced home or car. Additionally, a home or car that is owned outright cannot be seized, though you can make the personal decision to sell it to cover your debts.
You will be asked to list all your property. You will be asked to indicate whether it is owned, partially paid off, inherited, gifted, or from a personal or bank loan. This is called your “bankruptcy estate.” Since this can feel like the bankruptcy courts are trying to take everything you own, some people commit fraud by leaving assets off this list.
It is in your best interest to put everything on this list. Your bankruptcy trustee will review the list and your state’s rules on exemptions. In most cases, much of your property will be exempt and cannot be sold in the bankruptcy proceedings. If you leave something off the list or transfer money to someone else to hide it, the money or asset can:
- Become nonexempt.
- Be seized by the trustee.
The hiding of assets in a fraud scheme has backfired on many filers who would have had the property protected in the first place.
Misrepresenting the Real Value of Your Property
Sometimes, filers list assets but try to conceal or downplay how much the assets are worth. Be advised, the trustee can have the property valued, so they will be able to find out the truth. Even if you were not aware of the value of the asset and made an honest mistake, it could be considered concealment of assets or perjury. When in doubt, you or your attorney can get a fair assessment of the property before you list it on your bankruptcy forms.
The undervaluing of property can be an honest mistake, but you should make every effort to avoid it. Getting appraisals or finding old receipts for artwork, jewelry, equipment, and other assets will keep you safe in the long run — and does not mean that a trustee will come to seize every expensive or sentimental item you own. Your state has wild card exemptions to help you keep some items.
Transferring Money or Property to Hide It from the Trustee
The trustee can look back on your financial and credit history from 90 days to two years, and if you are facing criminal fraud charges and there is an evidence trail, the courts can look back even further. There is a statute of limitations of seven years for fraud, and it can open a can of worms for past crimes and spread the blame to your family and friends.
It is not a good idea to hide assets and money before you file for bankruptcy. Remember, your case does not start the day you submit forms because your credit history and accounts can show all your past actions. These are called “pre-bankruptcy actions.”
Common fraudulent pre-bankruptcy actions include:
- The gifting of large amounts of money or property to others
- The transferring of a car, boat, or property titles to family or children
- The selling of property for a small amount of money. Example: selling a $30,000 vehicle to a family member or friend for $1,000 so you can repurchase it later.
- Some small charitable contributions are not considered fraudulent under the Bankruptcy Code. It is still best to check with your attorney before making the contribution.
To avoid any suspicion of fraud, it is best to disclose any sales, major changes, gifting, transfer, or other significant financial actions to the trustee. You can have a conversation about what you did and why, and work with your attorney if a transfer is an issue.
Taking on Debt and Filing for Bankruptcy on Purpose
The filing of bankruptcy to discharge your debt can feel like a “get out of jail free” card, but filing for it over and over can be a form of fraud. A Chapter 13 bankruptcy requires a repayment plan, so it is more common for people to file a Chapter 7 bankruptcy multiple times with no intention of living debt-free.
Low-income filers often qualify for a Chapter 7 based on the Means Test, and it is easy to feel like they will never be out of debt. Your credit score will also take a significant hit after filing for bankruptcy, which can make it hard to get decent loans and interest rates. It can be very tempting to take on new debt with no intention of getting out of the debt hole you dug yourself into. This is called “acting in bad faith” and is a form of fraud.
Your trustee can review your past and future actions to see if you are, or have been, acting in bad faith. Bankruptcy is on your record for seven to ten years. The bankruptcy trustee can examine any of your past bankruptcy cases to look for patterns. If they are concerned or see a possible pattern, you may be charged with fraud and your case will be denied.
The acquiring of new credit cards, luxury item purchases, excessive lines of credit, significant travel, multiple bankruptcies, or any extraordinary behavior can appear to be taking on debt with no intention of repaying it.
Mistakes on Bankruptcy Forms
Honest mistakes can and do happen. Having a bankruptcy attorney on your side will help to fix common errors or matters that might need to be cleared up during the process. They can also help you avoid making mistakes before your trustee ever sees your bankruptcy paperwork. A small mistake will not launch a criminal investigation into your case, but the trustee might decide the error was an attempt to hide fraud or even start to review your forms more carefully. That can lead to charges of perjury or a fraud case against you.
Incomplete or wrong information is always a red flag to bankruptcy trustees and the courts. Since you need debt relief as soon as possible, it is in your best interest to clear up any mistakes right away and be honest about your information.
It is very easy to make mistakes during the bankruptcy process. Your best defense is a knowledgeable and experienced bankruptcy attorney helping you from the start. They can help you do it right the first time and avoid misinterpretations that can come across as fraud.
If you are considering filing for bankruptcy or are concerned that something you did might come across as fraud, call The Alliance Legal Group, PLLC at (757) 923-4357 to schedule a FREE, no-obligation consultation. Our team of knowledgeable and experienced attorneys is ready to help you understand you options and to fight for you as you push forward to a new and brighter future.
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