Federal Bankruptcy Fraud
Bankruptcy fraud is a federal criminal offense. These cases are investigated by the United States Trustee Program, which is a component of the Department of Justice responsible for overseeing the administration of bankruptcy cases and private trustees under 28 U.S.C. §586 and 11 U.S.C. §101, et seq. It consists of 21 regional U.S. Trustee Offices nationwide and an Executive Office for U.S. Trustees (EOUST) in Washington, DC.
The laws pertaining to bankruptcy fraud are broad but can be boiled down to a few categories: people who have lied under oath or provided false documentation during their bankruptcy proceedings, concealed or transferred their financial assets, committed tax fraud, using false identities to file for bankruptcy multiple times in multiple locations, bribing a bankruptcy trustee, and intentionally running up credit card bills with no intention of paying them off (also known as “credit card bust-outs”).
Understating the value of property and assets is the primary way in which people commit bankruptcy fraud. You must report all income and assets to the court-appointed trustee, who will sell some of your property to pay off creditors. If you hide some of your property, the trustee won’t be able to pay them the entire amount they’re entitled to under the law. Those who transfer property to friends or family so that creditors can’t find it are also committing fraud.
Bankruptcy fraud can be a civil wrong as well as criminal. The difference between criminal and civil fraud centers on the actor’s intent: Criminal fraud requires proving that the defendant acted with a knowing and fraudulent intent, while civil fraud involves less deception and cheating. (18 U.S.C.A. Section 152.) Let’s say you accidentally forget to inform the bankruptcy court about the 30-foot fishing boat your father-in-law gave you. Perhaps he stored it at his camp and you never took physical possession. This is not an instance of bankruptcy fraud. Knowingly concealing the boat by trying to hide it in his garage would be bankruptcy fraud, but forgetting it was given to you as a present would not be.
Making false statements on official bankruptcy forms, or intentionally leaving questions unanswered, is another type of bankruptcy fraud. The forms must be answered in their entirety, and you should be open and honest throughout the entire bankruptcy process.
There are limits on when and how many times a person or entity can file for bankruptcy. Filing multiple times is considered fraud. Some people use fake names and Social Security numbers to file for bankruptcy many times in the same state. Others use their true identities, but file for bankruptcy in different states. Whatever the method, the practice can be punishable by law.
The Department of Justice considers fraud involving a trustee as the worst form of bankruptcy fraud. That’s because a court-appointed trustee is deceiving the court, usually to receive a bribe from the person filing for bankruptcy. It also is a crime to bribe a creditor or for a creditor to receive a bribe from a debtor. For instance, the debtor might attempt to persuade a creditor not to file a claim by offering cash to the creditor.
Bankruptcy fraud can be punished with either civil or criminal penalties. When a person files for bankruptcy, the court appoints a bankruptcy trustee, a person who administers the case. If the trustee believes the debtor committed fraudulent actions, it can ask the court to impose a civil penalty. These penalties do not involve potential jail sentences or other criminal penalties.
However, if the fraud is serious enough, the trustee might refer the case to federal prosecutors. They can then investigate the claim and may file a criminal case against the debtor. Criminal penalties are more serious, involving jail, fines, and other penalties.
Forfeiture of discharge rights: Bankruptcy allows you a fresh start because, once you finish the bankruptcy process, your creditors can no longer take collections actions against you. This is known as a debt discharge. If you commit bankruptcy fraud the court may deny you a discharge, meaning your creditors can sue you, foreclose on your property, or take any other collection actions the bankruptcy would otherwise protect you from.
Loss of exemptions: When you file for bankruptcy you have to tell the court about everything you own, but that doesn’t mean everything you own can be used to pay back your creditors. Some of your property will be exempt, meaning you get to keep it no matter how much you owe. However, if you commit bankruptcy fraud the court may choose to deny those exemptions and let your creditors take the property that would otherwise have been yours.
Prison: A conviction for bankruptcy fraud can lead to up to a 5-year prison sentence. This is the maximum sentence, meaning a court could sentence you to anything up 5 years. However, if you commit more than one act of bankruptcy fraud the court can sentence you to up to 5 years per offense.
Probation: Probation is also possible in bankruptcy fraud cases. When a court orders a probation sentence, it requires you to comply with specific orders for the duration of the probation period, such as meeting with a probation officer and not committing more crimes. Probation typically lasts one to three years, though longer sentences are possible.
Fines: Fines for bankruptcy fraud can be very steep. A court can impose up to $250,000 in fines for each count or separate act of fraud. These fines can be imposed independently or in addition to prison or other penalties.