What Is Bankruptcy Fraud?

It is not uncommon for individuals or businesses to face financial difficulties that make it impossible to meet their debt obligations. In such cases, filing for bankruptcy may be a viable solution.

However, it is essential to approach this process with integrity. Bankruptcy fraud is a serious offense that carries significant legal consequences.

If you are filing for bankruptcy and are doing so honestly, you have little to worry about. Still, it is important to understand what constitutes bankruptcy fraud, including the most common types of violations and the potential penalties involved.

Definition of Bankruptcy Fraud

Bankruptcy fraud is considered a white-collar crime and can be defined in various ways. At its core, it involves dishonestly manipulating the bankruptcy process to avoid financial obligations or gain an unfair advantage—typically by reducing or eliminating debt owed to creditors.

Both individuals and businesses may commit bankruptcy fraud differently. Common examples include concealing assets, providing false or incomplete information on bankruptcy filings, or using bankruptcy to erase the traces of fraudulent financial activity at the expense of creditors.

While many cases involve deliberate deception, not all instances of bankruptcy fraud are committed with clear intent. In some situations, individuals may act without fully understanding the legal implications of their actions.

For example, they conceal assets or complete their bankruptcy paperwork inaccurately by omitting details. Others use the bankruptcy process to wipe out discrepancies to the detriment of creditors.

Different Forms of Bankruptcy Fraud

Bankruptcy fraud can take several forms, each involving a deliberate attempt to misuse the legal system for personal or financial gain. Understanding the various types is essential for recognizing red flags and avoiding unintentional violations. Below, we break down the most common forms of bankruptcy fraud and how they are typically carried out.

Before Filing for Bankruptcy

Fraud may occur prior to filing, especially when people use bankruptcy as a means to erase their bad debts. Listed below are the most common examples of fraudulent actions before filing for bankruptcy:

• Falsifying or creating false financial records to bolster a credit request in order to misrepresent the debtor’s worth
• Acquiring credit through fraudulent means (a typical example is when people misrepresent their assets or incomes on a credit/loan application)
• Presumptive fraud that involves obtaining significant cash advances or purchasing high-end luxury goods just before the bankruptcy is filed
• Buying items using pre-existing credit without planning to pay it back
• Deceptive business practices
• Intentionally writing a bad check

Related: Does bankruptcy clear tax debt

During Bankruptcy Proceedings

• The concealment of a pre-bankruptcy property transfer (e.g., this fraud occurs when people don’t disclose gifting a vehicle to their friends)
• Not disclosing assets on the proper bankruptcy schedule so that they don’t end up being liquidated to pay off creditors
• Multiple filings (when someone files for bankruptcy in different jurisdictions multiple times without revealing earlier filings)
• Submitting a false or incomplete bankruptcy application
• Intentionally falsifying information in bankruptcy documents
• Withholding or destroying documents

Beware of petition mills. Scammers pose as tenant advocacy services but secretly file for bankruptcy in the tenant’s name to prolong proceedings and charge excessive fees. Thus, they eventually leave tenants financially devastated.

Civil vs Criminal Bankruptcy Fraud: What Are the Differences?

Civil bankruptcy fraud involves dishonest actions like concealing assets during bankruptcy proceedings and typically results in financial penalties. On the other hand, criminal bankruptcy fraud is a federal offense involving intentional fraud, such as falsifying documents, and can lead to imprisonment.

Civil Bankruptcy Fraud

This type of fraud usually occurs when creditors file a lawsuit claiming misconduct pertaining to a certain debt. In the event of civil bankruptcy fraud, the court may take some of the following actions:

• Refusing to discharge the debt (in this case, the debtor is still liable for its repayment)
• Prohibition of another bankruptcy filing for a period after the case is dismissed
• Imposing other sanctions

Criminal Bankruptcy Fraud

The U.S. Department of Justice prosecutes criminal fraud cases in an aggressive manner after the F.B.I. (Federal Bureau of Investigation) investigate them thoroughly. In the United States, the majority of bankruptcy crimes are found in federal criminal statutes (18 U.S.C. § 151-57 and § 1344). The following are the common examples:

• Unauthorized filings and identity issues (false documents or false identity information)
• Falsifying and concealing information (hiding or destroying records)
• Corruption or bribery (bribing a court official or bankruptcy trustee)
• Embezzlement (stealing money from an estate in bankruptcy)
• Concealing assets
• Credit card abuse

Consequences Of Committing Bankruptcy Fraud

Now that you know more about offences of bankruptcy, you may wonder what happens if you are not truthful in your disclosures. Bear in mind that the consequences can be hefty, from penalties to serious criminal charges.

• Lesser penalties: In this case, offenders are usually required to repay their debt or pay a minor fine. Their bankruptcy discharge can also be rejected sometimes.
• Poor credit score: The credit score may suffer for those guilty of bankruptcy fraud. They often have a hard time removing it later.
• Criminal charges: Aside from hefty fines, fraudulent bankruptcy may result in imprisonment. Offenders can be required to pay a fine of up to $250,000 and/or spend up to 5 years in prison, depending on the type of fraud.

To avoid these scenarios, you need to be aware of the penalties and consequences. Make sure each step of the bankruptcy process is completed in a proper way.

It is best to consult with an experienced and trusted bankruptcy attorney who will make sure all the aspects of your bankruptcy filing are complete and accurate. That will not only make the process smoother, but it will also help you avoid potential problems like bankruptcy fraud.

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