Sometimes, people use bankruptcy to take advantage of their creditors. When this happens, federal bankruptcy laws exist that make bankruptcy fraud punishable as a civil offense or a serious federal crime.
In this post, we review the U.S. Bankruptcy Code to identify its laws that govern bankruptcy fraud, including:
If you want to ensure you avoid even the suspicion of fraud, please call Stone Rose Law at (480) 739-2448 to speak with a bankruptcy attorney.
Creditors may accuse you of bankruptcy fraud for any of several reasons. Some common situations in which a debtor can allege fraud in connection with bankruptcy are:
Bankruptcy fraud can happen before you file for bankruptcy. Certain pre-petition acts can be considered bankruptcy fraud by their very nature, like:
As we will see in more detail below, sometimes debtors can engage in behaviors during the bankruptcy process that can constitute fraudulent acts. Common examples of these kinds of activities are:
Federal laws define what constitutes bankruptcy fraud. The two most relevant federal bankruptcy fraud statutes are:
These are not the only laws that prohibit using bankruptcy to take advantage of others, but they apply to the most common kinds of bankruptcy fraud situations.
This statute identifies several kinds of fraudulent activities that can occur during the bankruptcy process. Some of these fraudulent activities occur before you file your bankruptcy petition, and others after doing so.
As a general rule, when you petition for bankruptcy, you must disclose all property that belongs to you and your spouse (if applicable). This also includes your business and assets held by your business.. Knowingly and fraudulently concealing property to keep it out of the bankruptcy estate is bankruptcy fraud.
The most frequently occurring form of bankruptcy fraud is when a person filing for bankruptcy tries to hide assets. About 70% of all bankruptcy fraud cases involve asset concealment.
Common examples of asset concealment include:
You are required to be truthful in your written and oral declarations to the bankruptcy court and the bankruptcy trustee. If you knowingly provide false information in your bankruptcy petition or other filing with the court, this is a form of fraudulent behavior.
This is similar to making a false oath or account. If you make a false declaration, or provide a false certificate, verification, or statement under penalty of perjury, this is fraudulent activity.
If a business is the bankruptcy debtor, then anyone who takes property or other assets from the business for personal use while acting as an agent or officer of the business commits bankruptcy fraud. Embezzlement is one form of this kind of fraud.
Most forms of bankruptcy fraud are those that the debtor engages in. One exception is that a false claim of proof that a creditor files with the court is a form of fraud by the creditor.
Knowingly and fraudulently offering, soliciting, paying, or receiving any kind of compensation in exchange for attempting to influence a bankruptcy proceeding is bankruptcy fraud.
An example of this kind of activity includes offering compensation to individual creditors in return for approving the debtor’s reorganization plan or debt repayment plan. Another example is trying to bribe the bankruptcy trustee or any other official of the bankruptcy court.
Individual and business debtors who withhold information relating to the property or financial affairs of the debtor after filing for bankruptcy commit bankruptcy fraud.
A person who receives property after the debtor files for bankruptcy commits bankruptcy fraud. This includes anyone who receives a transfer of property belonging to the bankruptcy estate.
Knowingly falsifying, hiding, destroying, mutilating, or tampering with records like documents, accounting ledgers and books, papers, and other records connected with the debtor after filing bankruptcy is a type of fraudulent activity.
The legal concept of “fraud” includes knowingly making false statements or other misrepresentations to someone else to disadvantage that person in a transaction or proceeding. As we have seen above, 18 U.S.C. 152 identifies several kinds of fraudulent acts and omissions.
18 U.S.C. 157 includes three more broad kinds of fraudulent activities. These involve devising a “scheme or artifice” to defraud and executing that scheme or artifice or attempting to do so.
These activities include:
In other words, 18 U.S.C. 157 makes it illegal to use the bankruptcy process itself to engage in fraudulent activity, in the same way other federal laws make it illegal to use the U.S. mail, telephone, or online means of communication to commit fraud.
Some specific examples of bankruptcy fraud under this statute include:
Violations of 18 U.S.C. 152 or 157 can result in a federal prison term of up to five years, a fine of up to $250,000, or both.
The severity of the penalties depends in part on the underlying nature of a bankruptcy fraud conviction, specifically whether it is civil or criminal.
The main difference between criminal and civil bankruptcy fraud is the intent of the debtor’s behavior. The more knowing and purposeful the acts, the more likely the prosecution will seek a criminal conviction.
Civil cases usually arise when a creditor files a lawsuit regarding one particular debt. They are more likely to arise in the context of alleged violations of 18 U.S.C. 152.
A civil case conviction can lead to court-imposed sanctions, including:
Violations of 18 U.S.C. 157, which involve schemes or artifices meant to deceive multiple creditors or to abuse the bankruptcy process generally, are more likely to lead to criminal fraud investigations and convictions.
Some examples of fraudulent activities that can trigger a criminal fraud investigation include:
Criminal bankruptcy fraud cases often involve alleged violations of other laws, like tax fraud, mail or wire fraud, money laundering, mortgage fraud, bank fraud, embezzlement, or identity theft.
The Federal Bureau of Investigation is the primary investigative agency for criminal bankruptcy fraud cases, although it often partners with other federal agencies like the Internal Revenue Service in its investigations.
In addition to 18 U.S.C. 152 and 157, other federal laws make it illegal to abuse the bankruptcy system in the absence of fraudulent intent. Depending on the underlying nature of fraudulent activity in connection with a bankruptcy, it may be possible to violate one or more of these other laws.
Examples of unlawful acts that can occur in connection with a bankruptcy fraud prosecution include:
Your defenses against accusations or charges of bankruptcy fraud have multiple layers, starting with your activities before filing a bankruptcy petition.
For example, if you are not confident of your ability to repay a debt, then it is a good idea not to incur it in the first place, lest a creditor choose to believe that you never intended to repay it.
Similarly, if you anticipate the need to file for bankruptcy protection, you should resist the temptation to selectively keep assets out of the bankruptcy petition in the hope that the bankruptcy trustee or your creditors will not notice.
List all your creditors in the bankruptcy petition, including the ones you intend to repay outside of bankruptcy or post-discharge.
Criminal fraud requires proving intent. Acting in good faith helps show that you did not have the necessary intent to knowingly defraud your creditors to mislead the bankruptcy trustee or the judge.
If you make a mistake or an inadvertent omission in preparing your petition, correct it as soon as possible.
Hire an experienced bankruptcy attorney to help you prepare your bankruptcy petition and supporting documentation. This can help you avoid making mistakes in preparation that a creditor could construe as fraudulent activity.
Your bankruptcy attorney can help you to:
To avoid the suspicion of fraud, a Stone Rose Law bankruptcy attorney can help you with your filing and ensure that you are in full compliance with the requirements of filing a bankruptcy.
Call us today at (480) 739-2448 to speak with an experienced bankruptcy attorney in a free consultation. Alternatively, you can use our online contact form to ask a question or schedule a free initial consultation.
