What Is Bankruptcy Fraud?

Committing fraud before or during bankruptcy can result in serious consequences, including a denial of discharge, a fine, or even a criminal conviction. Read on to learn more.

Filing for bankruptcy is a great way to get a fresh start. But you must play by the rules. Any dishonest dealings before or during the bankruptcy process could rise to the level of bankruptcy fraud, so avoid needless trouble by following these tips:

• accept that you might not be able to keep all of your property
• don’t use bankruptcy to wipe out shady business dealings
• complete your bankruptcy paperwork truthfully, and
• learn the consequences of civil and criminal bankruptcy fraud.

Exchanging Property With Creditors for Debt Relief in Bankruptcy

While the powerful relief afforded by bankruptcy frees you from overwhelming debt, it comes at a cost to your creditors. Bankruptcy law attempts to mitigate this loss by giving your creditors a share of your nonessential assets in exchange for wiping out your debt. You’ll disclose all property you currently own (and asset transfers) and keep the things you can exempt—generally property needed to maintain a job and home.

Fraud That Starts Before Bankruptcy

Fraud doesn’t always play out within the bankruptcy itself—it can occur before the bankruptcy filing. Here are some examples: 

• obtaining credit under false pretenses, such as misrepresenting income or assets on a credit or loan application
• falsifying financial documents used to support a credit request (misrepresenting the debtor’s worth)
• purchasing items on existing credit with no intention of repaying the debt (proven by showing the lack of an ability to pay at the time of purchase)
• charging expensive luxury items or taking out substantial cash advances shortly before filing for bankruptcy (often called “presumptive fraud”)
• knowingly writing a bad check, or
• engaging in deceptive business practices.

Fraud Committed During Bankruptcy

Example of fraud committed during bankruptcy include:

• failing to list an asset on the appropriate bankruptcy schedule to prevent it from being sold for the benefit of creditors
• concealing a property transfer that occurred before the bankruptcy (for example, failing to disclose gifting a car to a friend)
• providing a false document to the bankruptcy court or trustee
• destroying or withholding documents
• knowingly making a false statement in the bankruptcy paperwork or to the bankruptcy trustee at the 341 meeting of creditors, or
• paying someone to help hide property from the court.

Criminal Bankruptcy Fraud

A significant scheme to deprive multiple creditors would be more likely to rise to the level of criminal bankruptcy fraud. Under federal law, cases of criminal fraud are investigated by the Federal Bureau of Investigation (F.B.I.) and aggressively prosecuted by the U.S. Department of Justice (D.O.J.). Although the bulk of the crimes apply to debtor activities (the person who files the case), creditors, bankruptcy trustees, court personnel, and third parties can also be convicted of bankruptcy crimes.

Also, many types of dishonesty are often involved in criminal bankruptcy fraud, some of which are also crimes. You’ll find most bankruptcy crimes in federal criminal statutes. (18 U.S.C. §§ 152, 157.) Here are some examples.

Concealing Assets

• failing to disclose a property transfer that took place before filing the case
• failing to disclose assets in the bankruptcy paperwork, and
• enlisting someone’s help to hide property.

Concealing and Falsifying Information

• filing a false or incomplete bankruptcy form, and
• destroying or hiding records.

Identity Issues and Unauthorized Filings

• filing a bankruptcy case using false identity information
• filing multiple bankruptcies in different jurisdictions, with or with property identification, and
• filing a bankruptcy case on another’s behalf without authorization.

Bribery and Embezzlement

• bribing a trustee or court official, and
• embezzling funds from a bankruptcy estate.