Bankruptcy fraud is a white-collar crime that takes four general forms. In the first form, debtors conceal assets to avoid having to forfeit them. In the second form, individuals intentionally file false or incomplete forms. In the third form, individuals file multiple times for bankruptcy in several states. Finally, in the fourth form, a person bribes a court-appointed trustee. More commonly, the criminal will couple one of these forms of fraud with another crime, such as identity theft, mortgage fraud, money laundering, or public corruption.
Concealment of Assets
Nearly 70 percent of all bankruptcy fraud involves the concealment of assets. Creditors may liquidate only those assets listed by the debtor. If the debtor fails to reveal certain assets, the debtor can keep the assets despite having an outstanding debt. To further conceal assets, businesses or individuals transfer these unrevealed assets to friends, relatives, or associates so that the assets cannot be located. This type of fraud raises the risk and costs associated with lending.
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Petition mills are a type of bankruptcy fraud scheme on the rise in the United States. Petition mills purport to keep financially strapped tenants from becoming evicted by passing themselves off as a consulting service. While the tenant believes that he or she is receiving help in avoiding eviction, the petition mill files bankruptcy for the tenant and drags out the case. Meanwhile, the “service” charges exorbitant fees, empties the tenant’s savings account, and ruins the tenant’s credit score.
Multiple Filing Fraud
Multiple-filing fraud consists of filing for bankruptcy in multiple states using either the same name and information, aliases and fake information, or some combination thereof. Multiple filings slow the court systems’ ability to process a bankruptcy filing and liquidate the assets. Often, multiple filings provide more cover for a debtor trying to engage in the concealment of assets.
A proceeding in which suspects are charged with bankruptcy fraud is criminal in nature. Proof of fraud requires showing that the defendant knowingly and fraudulently made a misrepresentation of material fact. Bankruptcy fraud carries a sentence of up to five years in prison, a fine of up to $250,000, or both.