Filing for bankruptcy can be a last resort for those in dire financial trouble. At such a difficult time, some people decide to try to keep some of what they have by hiding assets, falsifying forms, and committing perjury.
What is Bankruptcy Fraud?
Hiding any assets while filing for bankruptcy is known as bankruptcy fraud and it can lead to a civil lawsuit and even criminal charges involving an investigation by the FBI. It’s something bankruptcy candidates should avoid, and it’s important to stay informed about what can trigger an investigation so that you don’t unintentionally end up in trouble.
What Leads to a Bankruptcy Investigation?
It’s reassuring to keep in mind that bankruptcy fraud occurs when you knowingly try to deceive the bankruptcy court, but it doesn’t apply to innocent mistakes.
If you make an error on a form or misspeak in a statement, you’ll be allowed to correct it. It’s when you intend to conceal certain information for your own benefit that you can get into hot water.
What Assets Can You Lose if You Declare Bankruptcy?
You might think you’d never attempt fraud no matter how bad things get. However, when many valuable possessions are at risk it can be tempting to try to protect or hide those assets from your “bankruptcy estate.”
Your “bankruptcy estate” is the term given to your financial assets that are fair game when creditors seek to reclaim debts. Your estate will include any property you own at the time you file. Even an inheritance that you don’t have access to yet can be included. Money from an expected tax refund may be claimed by creditors as well.
Creditors can claim property that you’ve sold or given away in the past few years under some circumstances.
Types of Bankruptcy Fraud
Taking on Debt without Planning to Repay
People may know they are heading for bankruptcy but continue applying for loans and buying things on credit. Creditors may try to prove that filers were behaving this way because they thought they would never have to pay it back once they filed. These actions can threaten your bankruptcy approval and lead to criminal charges.
Concealment of Assets
The concealment of assets is the most common scheme used by individuals filing for bankruptcy and makes up a majority of bankruptcy fraud cases.
- Hiding Property You Own: One of the tricks used most often is to fail to divulge a property or asset you own. Creditors get paid by the sale of these assets, so they will be very interested to make sure everything the filer owns is listed in bankruptcy documents.
- Hiding the Value of Property You Own: Filers may list an asset correctly but they could purposely report its value much lower than it actually is. Major differences in what property is worth and what it’s down for can lead to an investigation.
- Disposing of Property: Before having to list an asset, an individual may try to get a possession out of his or her own name by selling it to a friend or relative at a greatly reduced rate. The individual could also start signing over ownership on certain assets to try to keep creditors from taking them.
Petition mills are well-organized schemes that often prey on people who are in jeopardy of losing their homes or being evicted. A fraudulent organization appears and claims it can save a person’s home by working with the landlord. The debtor agrees to pay a fee for help.
The organization doesn’t actually provide help or contact the landlord. They take the debtors’ personal information to file bankruptcy in their name to delay an eviction. While the bankruptcy process plays out, the petition mill continues to charge tenants, sometimes monthly, and ruin their credit. Soon the debtors are evicted anyway, and the con artists are long gone with the last of their money.
Can Creditors Be Guilty of Bankruptcy Fraud?
Creditors and bankruptcy trustees can be guilty of fraud. Creditors can solicit unfair favor with a trustee or even bribe them for a favorable determination. Creditors can also purposely declare that a debtor owes more than they actually do.
Trustees have been found guilty of embezzling money out of debtors’ assets. For more information on the bankruptcy process and the role of bankruptcy, trustees visit our Ultimate Guide to California Bankruptcy page.
A multiple filings scheme takes the concealment of assets illegal strategy and attempts it across multiple states. Individuals file bankruptcy in different states purposely failing to list every asset they own on each filing. They can use their own identity or stolen identities to file in the hopes of being able to protect more of their property from creditors.
What Are the Penalties for Bankruptcy Fraud?
Bankruptcy fraud investigations are sparked when discrepancies are found by your bankruptcy trustees or brought up by creditors. Relatives, coworkers, and former business partners can also tip off investigators to a problem.
An investigation can lead to your bankruptcy attempt failing and losing your chance at earning a discharge from your debt. With evidence of fraud and a failed bankruptcy bid, creditors are no longer held at bay by an “automatic stay” and can move forward with civil lawsuits to obtain everything you own.
Bankruptcy court is part of the federal court system, and any suspected criminal fraud is investigated by federal investigators. A fraud conviction is a felony and can lead to years in prison and thousands of dollars in penalties.
Bankruptcy Fraud Criminal Investigations
If bankruptcy trustees find a reason for concern and suspect fraud, they will alert the U.S. Trustee’s Office and turn the case over to them. Depending on the particular types of fraud they find and if white-collar crimes are involved the F.B.I. may be called in to also look into a bankruptcy claim.
Bankruptcy Fraud Criminal Penalties
These cases are decided by the U.S. Department of Justice. If you are found guilty you can receive up to 20 years in federal prison and a fine of $250,000 per count. Lesser fraud offenses can earn probation, community service, and special monitoring.
Contact a Los Angeles Bankruptcy Lawyer
Weighing the decision to file for bankruptcy can leave you feeling vulnerable both financially and emotionally. It’s a challenging process, but it’s one that could lead to your financial freedom down the road.
The bankruptcy attorneys with The Law Offices of Steers & Associates in Los Angeles stand ready to help you with those first difficult steps. They’ll be there through the entire process of bankruptcy from accurately collecting all of your financial information for “filing day” all the way to “discharge day” when you are freed from your debts.
Don’t decide to file for bankruptcy without a legal expert at your side and then end up losing your chance at getting out from under creditors over a simple mistake. Allow someone with a trained eye to check over every document and submission to make sure your filing stands up to any scrutiny. If you are looking for a bankruptcy attorney in Los Angeles or anywhere across Southern California please contact us today.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.