Bankruptcy Fraud: 7 Ordinary Owner Mistakes That Look Like It to a Trustee

Most people who get in trouble for fraud aren’t actually hiding anything. Ordinary, non-malicious financial choices can look like fraud to a trustee. In most cases, before filing, the owner shifted some things around -- typically nothing malicious, just their house, a few loans, and some other assets -- and the trustee didn’t like it.

Bankruptcy fraud is a serious offense that can have severe consequences. If a debtor knowingly and fraudulently conceals property, makes false oaths, or destroys records related to the bankruptcy case, they can face up to 5 years in prison.

The trustee’s job is to ensure fair treatment of all creditors. The trustee checks every transfer made before the filing of bankruptcy. A trustee who suspects a crime must report it to the U.S. attorney.

Common Mistake

The first mistake people make is selling or giving things to family members for less than they are worth. When you sell something to anyone for less than it’s worth, you, in a technical sense, gave the person a gift. The bankruptcy trustee suspects that people sell to family members to hide assets. The trustee can unwind a below-value transfer made within 2 years before the filing if the business was insolvent at the time or became insolvent because of the transfer. The trustee doesn’t have to prove that you intended to defraud creditors when doing these types of transfers.

Putting assets away in a family member’s name is likely to blow up in your face. Not only could you lose the property, but you can lose your discharge, and you might even get prosecuted for bankruptcy fraud. If you plan to sell to family, keep your nose clean by making sure it’s a fair deal.

The second mistake is trying to favor friends, family or business partners over other creditors. The trustee can usually recover payoffs of debts made to certain relatives or business partners (insiders) during the year before the bankruptcy is filed, if you were insolvent when you made the payment, and the payment gave the insider more than the insider would have received in a Chapter 7 liquidation. Say you paid $1,000 back to your mother, then filed 2 months later. Because you were insolvent at the time you paid the money back, the trustee can sue your mom to get that money. If you want to give someone you are closely related or connected to a leg up, it better be in the after-bankruptcy rather than before-bankruptcy period.

The third mistake people make is paying off a loan right before filing. The trustee can recover payments made to ordinary creditors within 90 days of the filing, if, at the time of payment, the business was insolvent and the creditor got more than it would have in a liquidation. Some payments made to creditors within 90 days before filing are all right. The trustee can’t unwind ordinary-course payments. If your debts are mostly business debts, there is also an exemption to preference actions for payments totaling less than $8,575 (since April 1, 2025). Also, if you pay off a loan, and that raises your equity in the thing, you may not have enough exemption to cover it, and the trustee may ask for the excess.

The fourth mistake is taking on new debt after you commit to filing. Some people, however, will decide that if they are going to declare bankruptcy soon, they may as well “live it up” in advance. If you knowingly charged goods and services that you had no intention of paying for, that can be fraud. If you charge more than $900 worth of “luxury goods or services” from one creditor within the last 90 days before filing, those charges may be considered not dischargeable. If you withdraw more than $1,250 cash advances using your credit card within the last 70 days before filing, it is presumed to be non-dischargeable.

Another common mistake is raiding retirement accounts. Most types of retirement accounts are exempt, but once they are cashed out, they may no longer be exempt. However, if you repay creditors by taking a hardship withdrawal from your retirement plan, or by liquidating a retirement account to pay unsecured creditors, the trustee can seek to recover that money from the recipients.

A sixth mistake people make is to rush to file. The truth is that rushing to file with incomplete records may mean your trustee may treat you with suspicion. People in a rush to file often leave things out. Even forgotten income can pose problems. Underestimating a large refund, or forgetting about a paid or outstanding bonus can land you in trouble in the long run. An under-reported income can lead to loss of the discharge. The trustee’s suspicions can be aroused simply because of not having financial records to prove what you did or did not do with certain property. Not knowing what happened to your assets could land you in trouble.

The seventh mistake is leaving things off of the schedules. Lying on the forms or in court is the single worst thing you can do. Not listing an asset or not valuing it properly can lose it, lose your discharge, and expose you to bankruptcy fraud charges. Your creditor meeting happens 21 to 40 days after a Chapter 7 filing. The trustee questions you under oath. There’s a 60-day clock for creditors or the trustee to object to your discharge.

Hiring a Knowledgeable Bankruptcy Attorney

These and other bankruptcy traps can usually be avoided by hiring a knowledgeable bankruptcy attorney before you start paying any significant pre-bankruptcy debts or moving money around. Get advice early, before you pay anything, move or sell anything, or cash out any bank, 401(k) or other account. Tell your attorney everything of material significance -- everything the trustee is likely to want to know. Don’t omit something because it looks bad.