Bankruptcy proceedings allow businesses and individuals to reorganize or eliminate their debts. The United States Bankruptcy Code requires petitioning debtors to be open and honest with the court. Debtors who commit acts of fraud during the bankruptcy process face up to five years in prison and $250,000 in fines. The United States Department of Justice encourages people to report suspected bankruptcy fraud to it.
A bankrupt debtor may try to conceal his assets from the court to protect them from liquidation to pay creditors. Failing to disclose assets in bankruptcy proceedings equals fraud. You cannot carry out acts such as hiding assets in the names of friends or relatives. For example, you cannot transfer your car to your brother for $1, nor can you destroy documents, such as a bill of sale for a diamond ring, to protect assets from bankruptcy sale.
Bankruptcy filings are submitted to the court under oath, and intentionally providing false information in court documents carries penalties for perjury. Bankruptcy fraud also includes making untruthful statements during court examinations. Fraud does not cover honest mistakes, such as clerical errors, or innocent misstatements. Evidence must exist to show that a debtor's omission of facts or false statements were deliberate.
A debtor who attempts to bribe a government official during bankruptcy proceedings commits fraud against the court. The debtor, or anyone acting on his behalf, such as his attorney, commits fraud by giving or offering a court official a benefit in exchange for special treatment. For example, bankruptcy judges appoint trustees to control and liquidate bankrupt debtors' estates. If a debtor offers the trustee money to unfairly favor one creditor over another, fraud through bribery occurs.
A debtor commits fraud if she commits tricks or scams in anticipation of filing bankruptcy. For example, a "bust-out" scam involves building credit with providers of goods and services starting with small transactions. The creditor develops trust in the debtor, allowing large debts to accumulate. The debtor then stalls payment of the big debts until she can claim bankruptcy. Bust-outs, or similar schemes, are illegal because they attempt to use the bankruptcy court to avoid payment to legitimate creditors.
References & Resources
- Cornell University Law School: Legal Information Institute: Bankruptcy Fraud
- Frost, Brown, Todd, LLC: Recognizing Bankruptcy Fraud and Using Experts to Deal With It
- The United States Department of Justice: Report Suspected Bankruptcy Fraud
- Cadden & Fuller, LLC: Bankruptcy Law: Understanding Fraudulent Conveyances
- Totalbankruptcy.com: Bankruptcy Fraud: Definitions and Penalties
- Allmand Law: Making A False Oath Can Lead To Denial Of Bankruptcy Discharge
- Cornell University Law School: Legal Information Institute
- Merriam-Webster.com: Bribery
- Stockbyte/Stockbyte/Getty Images