Criminal Defense Lawyers

The ultimate guide to the federal bankruptcy fraud statute

Last Updated on: 1st June 2025, 09:28 pm

What Federal Bankruptcy Fraud Actually Means

18 U.S.C. § 157 makes bankruptcy fraud a federal felony, punishable by up to 5 years in federal prison. This isn’t just about making mistakes on paperwork. The government has to prove you knowingly and fraudulently made false statements, concealed assets, or otherwise tried to game the bankruptcy system. Bankruptcy fraud charges rarely come alone. They’re usually paired with wire fraud, mail fraud, or money laundering charges that can add decades to your sentence. The feds take bankruptcy fraud extremely seriously because the entire bankruptcy system depends on honest disclosure. When someone lies in bankruptcy court, it’s not just creditors who get hurt – it undermines the fresh start that bankruptcy is supposed to provide to honest debtors. Federal prosecutors know this, and they pursue these cases aggressively. The U.S. Trustee’s office has dedicated criminal enforcement units whose only job is hunting down bankruptcy fraud. They work hand-in-hand with the FBI, IRS Criminal Investigation Division, and other federal agencies to build these cases.

How the Government Builds These Cases

The U.S. Trustee Program reviews every single bankruptcy filing.

They have sophisticated data analytics that spot patterns – assets moving between accounts, inconsistencies between tax returns and bankruptcy schedules. The FBI’s Financial Crimes Unit takes over from there, and they have tools most people don’t know about. They can trace cryptocurrency transactions, uncover offshore accounts, and reconstruct deleted financial records. Bank record analysis is their bread and butter – they’ll pull every statement, every wire transfer, every check image going back years. One client thought he was clever moving money through his business accounts – the FBI traced every penny through seventeen different transactions across nine accounts.

Asset tracing has become incredibly sophisticated. These forensic accountants who specialize in following money trails will examine property records in every state, business ownership databases, vehicle registrations, even storage unit rentals. One case involved the FBI discovering hidden assets by analyzing a debtor’s social media posts – the guy posted pictures of his new boat while claiming to be broke in bankruptcy court.

The Timeline Problem That Traps People

Any payments to creditors during the 90 days before filing can be clawed back by the trustee – but lying about making these payments, that’s bankruptcy fraud. Doesn’t matter if it’s just paying back your brother-in-law before filing. They see it as preferential treatment of one creditor over others.

The one-year lookback period is worse. Any transfers to insiders – family members, business partners, friends – during the year before filing must be disclosed. People think they’re protecting assets by transferring them to relatives. A contractor we defended transferred his work trucks to his son eleven months before filing bankruptcy. He thought he was outside the lookback period because he misunderstood the rules. The prosecutor charged him with bankruptcy fraud and he faced 5 years in prison.

Timing affects how the prosecution views intent, which is everything in these cases. A transfer made two years before bankruptcy might be legitimate estate planning. The same transfer made two months before filing looks like fraud. The prosecution creates timelines showing every financial move leading up to bankruptcy – they’re looking for consciousness of guilt. Suddenly using cash more? Closing bank accounts? Changing direct deposit? Each action that might be innocent on its own becomes evidence of fraudulent intent when viewed on a timeline.

When Multiple Bankruptcies Become Criminal

Serial bankruptcy filings. The government hates them.

The bankruptcy code allows people to file multiple times under certain circumstances – but abuse of this right can land you in federal prison. Chapter 13 to stop foreclosure, dismiss, file again when the bank restarts. Do this enough and federal judges start asking questions. There’s now a national database that tracks every bankruptcy filing across all 94 federal districts. File in New York, dismiss the case, then file in New Jersey? The system flags serial filings automatically. US Trustees in different districts share information constantly. One client tried filing in three different states over two years – he’s now serving 37 months in federal prison.

Asset Concealment vs Bad Memory

Cross-district filing patterns are particularly suspicious to federal authorities. They assume you’re trying to hide assets or income by spreading filings across jurisdictions. Maybe you have property in multiple states, or you moved recently – doesn’t matter. WeWe’ve seen them use filing patterns as evidence of “sophisticated means” which enhances sentences under the federal guidelines.

The duty to disclose every asset, no matter how small. The $500 in the kid’s college savings account. The timeshare. Cryptocurrency holdings. They don’t care about honest forgetfulness – they’ll argue people should have been more careful. The “I forgot” defense rarely works because of the documentation requirements in bankruptcy. Signing schedules under penalty of perjury means swearing everything’s been disclosed. Bank statements, tax returns, pay stubs – documents often reveal assets people claim to have forgotten about. A client forgot about an old IRA with $30,000 in it. The prosecutor found it because it showed up on his tax return interest income. He claimed bad memory, but the jury saw quarterly statements.

The Creditor Meeting Trap

Expert testimony on financial complexity has become crucial in these cases. Forensic accountants explain how someone with multiple businesses, investments, and properties could legitimately overlook assets. The average person might have three or four accounts – business owners often have dozens. Factor in business accounts, merchant accounts, PayPal, Venmo, cryptocurrency wallets, investment accounts, and retirement accounts – it’s easy to miss something. The key is showing the oversight was innocent, not intentional. Documentation of efforts to locate all assets, hiring professionals to help, and amending schedules when discovering mistakes becomes critical.

The 341 meeting. Being under oath, being recorded, and the trustee asking detailed questions about finances. The trustee asks about transferring property in the last two years. Forget about putting your daughter on the checking account? That’s a federal felony. According to the FBI, they often get involved after these meetings when trustees spot inconsistencies. They’ll compare testimony to filed schedules, bank records, and other documents. Every word gets transcribed and can be used against you. Clients have been charged with perjury for saying “I don’t think so” instead of “no” – the prosecution argued the equivocation showed consciousness of guilt.

Sentencing Guidelines Reality Check

Recording and transcript issues make these cases complicated. Court reporters make mistakes, recordings can be unclear, and memories fade. By the time of indictment – often years later – remembering exactly what was said becomes difficult. But the prosecutor has a transcript they’re treating as gospel. Some cases are won by showing discrepancies between the audio recording and the official transcript. In one case, the transcript showed our client saying “no” to a question about transferring assets, but the audio clearly showed he said “I don’t know.”

The federal sentencing guidelines under Section 2B1.1: Base offense level 7, which means 0-6 months in prison. But that’s just the beginning. The guidelines add levels based on the loss amount – and in bankruptcy fraud, loss gets calculated in ways people don’t expect. Not just what creditors actually lost, but what they could have lost. Hide $100,000 in assets? The loss might be calculated as the entire amount of debt discharged in bankruptcy – potentially millions.

According to USSC’s primer on loss calculation, each increase in loss amount adds levels. Sophisticated means adds 2 levels. Obstruction of justice adds 2 levels. Abuse of trust adds 2 levels for bankruptcy professionals or fiduciaries. Most bankruptcy fraud cases involve multiple victims, which adds more levels. A mortgage broker client ended up at level 29 after all enhancements – that’s 87-108 months in prison.

Defending Against Intent Requirements

Specific intent is the highest burden in criminal law. Proving someone acted with deliberate purpose to defraud. At Spodek Law Group, our attorneys dissect every action, every document, every statement for innocent explanations. That transfer to the wife? Legitimate estate planning based on advice from previous attorney. Those undisclosed accounts? Reasonable belief they belonged to the business, not personally.

Good faith reliance on counsel is one of the strongest defenses in bankruptcy fraud cases. Honestly relying on advice from bankruptcy attorney, means lacking intent to defraud. But this defense requires proof. Emails, letters, notes from meetings – anything showing what advice was received becomes crucial. The attorney-client privilege protects these communications, but gets waived by asserting the defense. The attorney becomes a witness explaining what they told the client. Some attorneys give terrible advice, and their clients pay the price. A doctor’s attorney told him transferring assets to an offshore trust was legal – it wasn’t, but the bad advice saved him from prison.

Post-Conviction Consequences Beyond Prison

Modern businesses involve intricate webs of entities, accounts, and transactions that even experts struggle to understand. Forensic accountants can show juries how complicated finances were. One client had seventeen different companies with cross-ownership, management agreements, and shared accounts. The prosecution claimed he hid assets by moving money between entities. Evidence showed normal business operations done for years before any financial problems. The jury acquitted on all counts.

Permanent bar from ever filing bankruptcy again. No matter what financial catastrophe hits in the future, bankruptcy relief is off the table. Medical bills, business failure, lawsuits – doesn’t matter. The safety net that’s been part of American law since the Constitution was written disappears.

Professional licenses evaporate after a bankruptcy fraud conviction. Lawyers get disbarred, doctors lose medical licenses, accountants can’t practice, real estate agents lose their licenses. Any profession requiring trust and honesty will likely impose bans. A commercial pilot client lost his FAA certification because bankruptcy fraud is a crime of dishonesty. Another client couldn’t renew his insurance adjuster license.

Criminal restitution never goes away. Not in bankruptcy, not after decades, not even in death – they’ll collect from estates. The authorities have extraordinary collection powers for criminal restitution. Wage garnishment, seizing tax refunds, taking Social Security benefits, and liens on every asset acquired. Interest accrues at the federal rate, currently around 5% annually. Some clients pay restitution for life. One owes $1.2 million – at $500 per month, that’s 200 years. His children inherit the debt.

Anyone under investigation for bankruptcy fraud, or worried about past filings, contact Spodek Law Group at 888-997-5177.