The bankruptcy laws were enacted to provide relief to persons in need, offering a fresh start to people experiencing significant financial challenges due to job loss, personal injury, divorce, or other life events. There are, however, specific laws to punish fraud and abuse within the bankruptcy process.
Bankruptcy fraud is a white-collar crime that takes four common forms:
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 a material fact. Bankruptcy fraud carries a sentence of up to five years in prison, a fine of up to $250,000, or both. A party can be charged with, and punished for, even attempting to commit bankruptcy fraud.
Commonly, the criminal will couple bankruptcy fraud with another crime, such as identity theft, mortgage fraud, money laundering, or public corruption. Also, the fraud need not occur while the bankruptcy is in process but may stem from actions taken before the filing of the bankruptcy petition. For example, a debtor may be charged with bankruptcy fraud if they run up the debt on a credit card, knowing at the time that they intend to file for bankruptcy protection.
Concealing assets is the most common type of bankruptcy fraud, accounting for more than two out of every three prosecuted cases. Typically, a debtor fails to disclose assets with the intent of preventing them from becoming part of the bankruptcy estate, where they would be sold, with the proceeds going to creditors. To conceal assets, debtors transfer them to friends, relatives, or associates, often with the understanding that they can take the assets back after the bankruptcy is over. A person may also be charged with bankruptcy fraud for paying a third party to conceal assets.
A debtor may face prosecution for bankruptcy fraud for:
This type of bankruptcy fraud may also be perpetrated by third parties, known as “petition mills,” which prey on financially strapped tenants facing eviction from their house or apartment. Passing itself off as a consulting service, a petition mill files a bankruptcy petition on behalf of the tenant, using the bankruptcy laws to suspend the eviction process. However, the mill will drag out the case and charge substantial recurring fees while the bankruptcy is in process, usually depleting the tenant’s financial resources and leaving them in worse shape.
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 courts’ ability to process a bankruptcy filing and liquidate the assets. Often, multiple filings provide cover for a debtor trying to conceal assets.
A debtor may be charged with bankruptcy fraud for offering any benefit to a trustee to affect the outcome of the bankruptcy proceeding.
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