All About Bankruptcy Fraud [Types + How to Recognize It]

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The subject of bankruptcy sounds like a nightmare, and bankruptcy fraud seems even scarier. But what is bankruptcy fraud? This article addresses the many types of such fraud and the differences between genuine bankruptcy and fraudulent ones.

What Is Bankruptcy?

Bankruptcy is the process through which businesses and individuals receive debt relief and helps creditors get some (or all) of their money back. The entire procedure is handled by the federal courts. Once a person files for bankruptcy, creditors cannot ask the debtor for their money back.

Bankruptcy typically happens when a company or person takes on too much debt and cannot pay it back on time. Genuine bankruptcy, however, is quite different from felony bankruptcy fraud. In a genuine one, you disclose all your assets and liabilities and the reason for not paying your debt back. In most cases, it’s filed by the debtors, and, once filed, most assets of the debtor are used to pay off remaining debts.

There are primarily two types of bankruptcies:

  1. Chapter 7: In this bankruptcy, most of your assets are sold to pay off debts. It’s filed by individuals or businesses who only have exempt assets, such as household goods or clothing. Those with such assets as a second home, valuable heirlooms, bonds, or jewelry must liquidate assets to pay off debt. A chapter 7 bankruptcy fraud is quite common since these types of bankruptcies are frequent.
  2. Chapter 13: This is usually opted by businesses that do not wish to sell off their assets. Instead, the company (or individual) forms a plan to pay off a part of the entire amount in installments—typically in three to five years in hopes of not losing their assets.

Some use bankruptcy as a last resort when not having sufficient income to pay off debts. Although bankruptcy wipes away debt, it can leave a long-term negative mark on your credit scores and makes it difficult to take future loans.

NOTE: Bankruptcy can make it challenging to get a job—it leaves the impression that you cannot manage your finances, which is one reason to avoid filing for bankruptcy.

What Is Bankruptcy Fraud?

Bankruptcy fraud is the act of (intentionally) presenting false information or hiding information from the courts during the bankruptcy process. Since bankruptcy is a complicated process, many tend to make mistakes, which is why lawyers can guide you through the process. But purposely hiding or providing false information to the courts carries harsh penalties, resulting in you paying a lot more.

Bankruptcy Fraud Types

Note the following two types of fraud that can occur before or during bankruptcy.

  • Pre-bankruptcy Fraud: Pre-bankruptcy fraud occurs before the person files for bankruptcy. Note some following instances considered as fraud.
  • Receiving credit under false pretenses: As per bankruptcy law, if you receive credit under false pretenses, it’s considered fraud. So, for example, declaring to creditors on the loan application that you have more income or property than you actually do to obtain a more significant loan amount is against the law.
  • Falsifying financial documents: Presenting a false document to creditors to support credit requirements is also considered fraud, including property paperwork and incomes that do not exist to get a larger loan.
  • Writing a bad check: A bad check refers to a check written for an amount not present in your bank account. Those who often do this can be charged with felony bankruptcy fraud.
  • Purchasing items via credit card without planning to repay: Credit cards allow you to purchase items on credit with the condition that you pay them back. Some, however, keep purchasing items, and their expenses become more than their actual income. Moreover, they have no intention of repaying the accumulated debt.
  • Buying expensive items prior to bankruptcy: If you buy expensive items 90 days before filing for bankruptcy, it will be considered fraud—a classic example done in white-collar crime.
  • Deceptive business practices: If you engage in deceptive business practices before filing for bankruptcy, courts consider it fraud. Courts do in-depth analyses of your business to ensure you’re not engaging in fraud.
NOTE: Most shell companies engage in bankruptcy fraud to help reduce their liabilities.

Key Takeaways

  • The bankruptcy fraud definition includes the act of presenting false information, omitting information, or hiding details from courts.
  • There are two types of genuine bankruptcy (Chapter 7 and Chapter 13) where the debtor cannot pay the loan.
  • Pre-bankruptcy fraud is committed before filing for bankruptcy.
  • Pre-bankruptcy fraud includes writing a bad check, receiving credit under false pretenses, falsifying documents, etc.

Fraud During Bankruptcy 

While you’re going through bankruptcy, it’s essential to be honest and transparent about your assets and liabilities. But many engage in fraudulent behavior by concealing information from the courts. Note the following examples that are considered to be intentional fraud.

  • Concealing/Hiding assets: Concealment of assets is considered to be fraud during bankruptcy. Undisclosed assets and their concealment can make matters worse for you since it’s considered perjury. It also includes taking the help of someone else to hide your property or not revealing the actual value of a property.
  • Concealing asset transfers: While it seems legal to transfer your assets before bankruptcy, this is not the case. Your trustee will look for recent asset transfers, and if they find that you’ve been hiding a property transfer, it will be treated as fraud. They will also look for recent property sales. In most cases, people tend to sell off their assets at a very low rate to a friend or relative. This also comes under fraud and can lead to a denial of discharge even after bankruptcy has been approved.
  • Showing false documents: Just as a concealed asset scheme is considered fraud, so is showing false documents to your trustee, including documents that hide the actual value of your assets, filling in wrong information, or filing an incomplete bankruptcy form. It also includes multiple filing, where you file for bankruptcy in more than one state. They may use a different name and social security number to protect their assets. This false information attempts to protect their assets during liquidation.
  • Hiding or destroying documents: Similar to showing false documents, hiding or destroying documents is seen as fraudulent behavior. Many destroy proof that they owe money, while others destroy documents that reveal undisclosed assets or the actual price of their assets. This is an intentional miscalculation of assets and a bankruptcy discharge settlement scam.
  • False statements in bankruptcy paperwork: Many opt for a scheme of making false statements in their bankruptcy paperwork, which can lead to a criminal conviction.

Petition mills are also frauds that pose as financial advisors to help financially strapped tenants from eviction. They file bankruptcy on behalf of a tenant and then charge exorbitant fees that leave individuals more in debt and financially drained. (The bankruptcy fraud statute of limitations for this criminal act is five years.)

Bankruptcy frauds are common, for which the penalty leads to a civil or criminal conviction. Jurisdictions for both are quite different but involve a fine or jail time. You mustn’t engage in any fraud while filing for bankruptcy.

Conclusion 

Bankruptcy is the process through which businesses or individuals can file for debt relief. It involves proper analyses of assets and liabilities. Pre-bankruptcy fraud is committed before filing for bankruptcy and includes writing a bad check or falsifying documents. Fraudulent behavior is also committed during the bankruptcy process, such as hiding assets or destroying documents. Fraud can lead to penalties, fines, and jail time.

FAQ

What happens if you lie in bankruptcies?

If you lie in bankruptcies, you can be convicted for a criminal or civil offense, leading to fines, penalties, or jail time.

How are creditors guilty of bankruptcy fraud?

What is bankruptcy fraud? Many may link this question to a particular sect of society. But it also applies to creditors who ask for more money than owed or hide documents that reveal the actual money owed.

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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