Federal Bankruptcy Fraud

Bankruptcy fraud is a serious crime that involves intentionally deceiving the bankruptcy court or creditors in a bankruptcy case. There are several common schemes used to commit bankruptcy fraud:

Concealing Assets

The most common type of bankruptcy fraud is when a debtor conceals assets to avoid losing them in the bankruptcy. When filing for bankruptcy, debtors must disclose all assets, or property they own, so creditors can claim a share of the proceeds when the assets are sold. If a debtor intentionally does not list certain assets, they can keep those assets while still discharging their debts in bankruptcy. This is illegal. Strategies used to conceal assets include:

• Transferring ownership of assets to friends or family members
• Not disclosing financial accounts, investments, or cash savings
• Undervaluing assets like real estate, vehicles, jewelry, art etc.
• Not reporting business ownership interests or transfers made pre-bankruptcy

Concealing assets unfairly prevents creditors from being paid and is a felony under federal law[1][2].

Petition Mills

Petition mills take advantage of vulnerable debtors facing eviction or foreclosure. They falsely claim to negotiate with landlords or lenders, then secretly file for bankruptcy in the debtor’s name without consent. The debtor gets hit with high fees but rarely sees results. This is an unethical scam[3].

Multiple Filings

Filing for bankruptcy in multiple states using the same or false information constitutes fraud. The debtor conceals assets by failing to list all of them in each case. It also burdens the courts and delays asset liquidation for creditors. While not directly criminal, multiple filings often facilitate asset concealment[2].

Bust-Out Schemes

Bust-out schemes involve racking up debt through credit cards or loans with no intention of repayment. The perpetrator then files bankruptcy to discharge the debt. This type of fraud emerged with increased access to consumer credit and is illegal[4].

Common Red Flags

There are certain patterns that may indicate bankruptcy fraud, such as[5]:

• Frequent address changes or use of P.O. boxes
• Suspicious asset transfers pre-bankruptcy
• Unexplained loss of assets listed on previous financial statements
• Businesses with minimal inventory or employees for their industry
• Debtor unable to explain source of income or cash deposits

Legal Consequences

Bankruptcy fraud carries severe penalties under federal law. The main statutes used for prosecution are[1]:

• 18 U.S.C. § 152 – Concealing assets, false statements, multiple filings
• 18 U.S.C. § 157 – Scheme to defraud creditors/court
• 18 U.S.C. § 1344 – Bank fraud

If convicted, penalties include fines up to $250,000 and up to 5 years imprisonment. Attempting or conspiring to commit fraud can also be charged[1].

Notable Cases

• In 2005, a CEO concealed over $1 million in assets during personal bankruptcy. He pled guilty to fraud and received 2 years in prison[6].
• In 2018, a loan officer was sentenced to 15 years for operating multiple mortgage and bankruptcy fraud schemes. Losses exceeded $22 million.
• In 2022, a man filed 5 bankruptcies concealing assets and income to avoid child support. He pled guilty to fraud and failure to pay child support.

How to Report Suspected Fraud

If you suspect bankruptcy fraud, report it to the U.S. Trustee Program at USTP.Bankruptcy.Fraud@usdoj.gov or the FBI at tips.fbi.gov. Victims of petition mills can also file complaints with state consumer protection agencies[3].

Seeking Legitimate Bankruptcy Relief

For those facing financial hardship, bankruptcy can provide a critical lifeline. Those considering filing should work with a reputable attorney and fully disclose all assets and liabilities. Attempting to defraud the system ultimately causes more harm than good.

References

1. https://www.law.cornell.edu/wex/bankruptcy_fraud
2. https://www.britannica.com/topic/bankruptcy-fraud
3. https://www.consumer.ftc.gov/articles/what-you-need-know-about-bankruptcy-petition-preparers
4. https://www.fraud-magazine.com/article.aspx?id=4295017586
5. https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy-fraud
6. https://archives.fbi.gov/archives/newark/press-releases/2005/nk120805.htm