Generally, fraud is dishonesty in some form, which is done with the intent that others rely on it so that you gain an advantage for yourself or cause a disadvantage to someone else. Since bankruptcy is intended to provide relief to the honest debtor and treat creditors as fairly as possible under the circumstances, bankruptcy fraud by any party involved in the process is taken very seriously. There are several penalties that can be applied.
The law provides a separate category specifically for bankruptcy crimes. Under the federal law, bankruptcy crimes involve some type of fraud or dishonesty. You are committing a bankruptcy crime if you hide assets, lie under oath, submit a false claim, bribe someone involved in the bankruptcy process, embezzle money or property from the bankruptcy estate, or otherwise commit fraud in connection with a bankruptcy filing. If found guilty, you can be imprisoned for up to five years and fined up to $250,000. These penalties can apply to anyone involved in the bankruptcy–not just the debtor.
Denial of Discharge
Fraud is a basis for the court to deny your discharge. If it can be proven that you engaged in fraudulent conduct, your discharge could be denied as to all debts; if the fraudulent conduct involved one debt, that particular debt could be declared nondischargeable, or not discharged. Even worse, if your discharge is denied, you may not be able to discharge the same debts in a later bankruptcy proceeding. If you receive your discharge before the fraud is discovered, it may also be possible to bring the matter back before the court for revocation of your discharge when the fraud comes to light.
Loss of Exemptions
Fraud can also put your exempt assets, which are normally protected in bankruptcy, at risk. Some courts have allowed bankruptcy trustees to recover losses caused by a debtor's dishonest or fraudulent acts from assets that you would normally be allowed to claim as exempt (or protect) in the bankruptcy case. More commonly, assets that have been hidden or transferred in an attempt to hinder, delay or defraud creditors will be recovered by the trustee and any exemption you would have been able to claim in the property (so that you could keep it) will be denied.
Dismissal of your bankruptcy case is probably the mildest penalty that can be applied. But even dismissal may have a long term effect. The bankruptcy court has the power to set waiting periods before you can file again. The court can dismiss your case with prejudice for a specific time. If this happens, you can’t file again until the time passes, unless you convince the court to change its ruling and shorten the prejudice period. The court can even ban future filings entirely if it is determined to be necessary to prevent you from abusing the bankruptcy laws in the future.