Bankruptcy Fraud?
The initial goal of the federal government in setting up the bankruptcy code was to provide honest debtors with a fresh start. For people who are truly in dire straights, bankruptcy protection can provide needed relief to get them back on their feet. A debtor’s property is sold off and proceeds are divvied up to his creditors to pay down his debts.
With the economy in the mess it currently is, the number of bankruptcy petitions being filed is rising dramatically. It has become a necessary evil in many people’s minds, and the stigma has diminished considerably. Unfortunately, this dramatic increase has also led to a disproportionate amount of suspected bankruptcy fraud.
Bankruptcy Fraud Explained
When dishonest debtors falsely file a bankruptcy claim, they often conceal their assets or file multiple bankruptcy petitions in different states. In these ways, they are hiding the true state of their finances and the court is using their false statements as fact. This is bankruptcy fraud, and it is a federal offense.
In nearly 70 percent of fraudulent personal bankruptcy cases, concealment of assets is the problem. This happens when people intentionally do not list all of their assets on the bankruptcy filing forms. Of course, the bankruptcy court and the creditors cannot sell property, vehicles, or other valuable items they don’t know about. Often, transferring assets, property, and money to relatives or business colleagues helps to hide these items so that they can’t be taken to pay off part of what is owed.
Another common problem is people that file multiple bankruptcy petitions in different states. They might use their correct names and Social Security numbers, false information, or combine real and fake information to file the petitions. They will typically list the same assets on each petition, without it being a complete list. This muddies the water as far as what is an allowed asset, and therefore not subject to confiscation and sale.
False forms are filed by some debtors. They might leave off a significant portion of their income, not completely list all of their assets and liabilities, or file as if they are separated from a wealthy spouse, when in fact they are not.
In rare cases, bankruptcy fraud occurs when a court-appointed trustee is bribed.
Bankruptcy fraud is a felony which has a maximum sentence of up to five years in prison, and a fine of up to $250,000. Defendants arrested for bankruptcy fraud are booked, photographed, and fingerprinted, and they will need to retain a lawyer.
Bankruptcy fraud is seen by prosecutors as the tip of iceberg when it comes to white-collar crime, with other more serious crimes such as identity theft, money laundering, mortgage fraud, and public corruption often involved with these same people. The Federal Bureau of Investigation (FBI) has targeted fraudulent bankruptcy filings for these reasons, and has even set up a place on the trustee’s website where the public can turn in suspected cases.
The FBI targets are those people and businesses that hide assets, make fraudulent interstate petitions, or involve bankruptcy filing with other criminal activity. The Department of Justice has estimated that around 10% of bankruptcies filed are fraudulent in some part, which certainly undermines confidence in the system.
An additional problem is the number of cases which involve the Internal Revenue Service. Records show that the IRS is often the major creditor on about 40% of the bankruptcy petitions filed each year, so protecting the tax interests of the IRS is important to ensure the collection of billions of dollars each year due the IRS.
The FBI, along with the IRS, have a few goals concerning bankruptcy fraud. They want to increase compliance, voluntarily, with tax laws by prosecuting major crimes in the bankruptcy area, as well as increasing the IRS presence with bankruptcy professionals. They want people to see them visible and be aware that they are keeping an “eye on the store”, so to speak. Also, it makes it easier for tipsters (dobbers) to report any instances that appear shady. By prosecuting criminally fraudulent bankruptcies, they hope to offer some concrete examples of what can happen when people abuse the system, and the penalties that can be imposed.
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