What Is Bankruptcy Fraud?

No one wants to be disqualified from filing for bankruptcy because of bankruptcy fraud or be accused of engaging in a bankruptcy scam—and if you're like most, you have nothing to worry about. However, because almost any dishonest dealings before or during the bankruptcy process could rise to the level of bankruptcy fraud, understanding what it is can help you avoid unnecessary problems.

A good way to start is by learning the definition of bankruptcy fraud and following a few essential tips. For instance, you'll want to accept that you might be unable to keep all your property. Also, complete your bankruptcy paperwork truthfully, don't use bankruptcy to wipe out shady business dealings, and learn the consequences of civil and criminal bankruptcy fraud.

What Is Bankruptcy Fraud in Bankruptcy Chapters 7 and 13?

No one wants to give up property in bankruptcy, and it can be tempting to "forget" that you own a few things. However, such actions could be considered bankruptcy fraud. Here's why.

While bankruptcy frees you from debt, it comes at a cost to your creditors. To minimize this loss, you're allowed to keep essential assets only. Your creditors are entitled to receive the value of your nonessential assets, and depriving your creditors of what they're owed is considered fraud in bankruptcy.

Here's how creditors are paid in Chapters 7 and 13.

• In Chapter 7 bankruptcy, the bankruptcy trustee—the court-appointed official who oversees your case—sells nonessential or "nonexempt property" and distributes the proceeds to your creditors.
• In Chapter 13 bankruptcy, the trustee doesn't sell property. Instead, you pay the value of the nonexempt property to creditors through a three- to five-year repayment plan.

What Is Considered Bankruptcy Fraud? A Bankruptcy Fraud Definition

Defining bankruptcy fraud isn't easy because many actions can be considered bankruptcy fraud—but the common thread is an attempt to pay a creditor less than what is owed using the bankruptcy process.

For instance, hiding assets, knowingly omitting required information on bankruptcy paperwork, or inappropriately using the bankruptcy process to a creditor's detriment are all actions associated with bankruptcy fraud.

In some cases, bankruptcy fraud can include actions people don't think twice about. Did you overstate your income on a credit application and now want to eliminate or "discharge" your credit card balance in bankruptcy? Or are you considering not listing valuable jewelry on the bankruptcy property disclosure? In both instances, bankruptcy might not be for you.

Below, you'll learn about types of bankruptcy fraud and when they begin.

What Type of Bankruptcy Fraud Starts Before You File?

Fraud doesn't always play out within the bankruptcy itself—it can occur before the bankruptcy filing. This problem often arises when someone tries to erase a prior bad act using bankruptcy. Here are examples of fraudulent behavior that might cause a creditor to ask the court to deny your discharge of a particular debt (you'll still owe it after the case ends):

• obtaining credit under false pretenses, such as misrepresenting income or assets on a credit or loan application
• falsifying financial documents used to support a credit request (misrepresenting the debtor's worth)
• purchasing items on existing credit with no intention of repaying the debt (proven by showing the lack of an ability to pay at the time of purchase)
• charging expensive luxury items or taking out substantial cash advances shortly before filing for bankruptcy (often called "presumptive fraud")
• knowingly writing a bad check, or
• engaging in deceptive business practices.

Be aware that the bankruptcy trustee will often work closely with a creditor or interested party when that person is making a fraud claim. For instance, if a creditor asks uncomfortable and probing questions 341 meeting, the trustee will likely continue the meeting to allow the creditor more time. Why would the trustee want to get involved? Because dishonest debtors hide assets, and the more assets the trustee finds, the more the bankruptcy trustee gets paid.

Learn more by reading When the Bankruptcy Trustee Suspects Fraud.

What Type of Bankruptcy Fraud Occurs During Bankruptcy?

Most people who file for bankruptcy are honest and transparent in reporting all assets. Still, it's not always the case—and the temptation to hide property can result in a bankruptcy fraud accusation. Here are examples of actions that, if intentional, would likely be problematic:

• failing to list an asset on the appropriate bankruptcy schedule to prevent it from being sold for the benefit of creditors
• concealing a property transfer that occurred before the bankruptcy (for example, failing to disclose gifting a car to a friend)
• providing a false document to the bankruptcy court or trustee
• destroying or withholding documents
• knowingly making a false statement in the bankruptcy paperwork or to the bankruptcy trustee at the 341 meeting of creditors, or
• paying someone to help hide property from the court.

Differences Between Civil and Criminal Bankruptcy Fraud

Not all fraud is the same. The severity of the consequences for civil versus criminal fraud differs substantially. Learn more about the differences between these two types of bankruptcy fraud.

Civil Bankruptcy Fraud

Civil cases usually arise when a creditor files a lawsuit (adversary proceeding) alleging wrongdoing involving one particular debt (see "Fraud That Starts Before Bankruptcy" above for a list of examples of common allegations). If the creditor proves its case, the court can do one or more of the following:

• dismiss the case and prohibit another filing for a period
• deny the discharge of the debt (the debtor remains responsible for paying it), or
• impose some other sanction.

Tip. Learning about presumptive fraud in bankruptcy is a good idea before filing. It's a trap that's easy to fall into and easy for a creditor to prove. Presumptive fraud occurs when a filer buys luxury items on credit or takes cash advances shortly before filing for bankruptcy.

Criminal Bankruptcy Fraud

A significant scheme to deprive multiple creditors would be more likely to rise to the level of criminal bankruptcy fraud. Under federal law, criminal fraud cases are investigated by the Federal Bureau of Investigation (F.B.I.) and aggressively prosecuted by the U.S. Department of Justice (D.O.J.). Although most crimes apply to the person who files the case, creditors, bankruptcy trustees, court personnel, and third parties can also be convicted of bankruptcy crimes.

You'll find most bankruptcy crimes in federal criminal statutes. (18 U.S.C. §§ 152, 157.) Here are some examples.

Concealing Assets

• failing to disclose a property transfer that took place before filing the case
• failing to disclose assets in the bankruptcy paperwork, and
• enlisting someone's help to hide property.

Concealing and Falsifying Information

• filing a false or incomplete bankruptcy form, and
• destroying or hiding records.

Identity Issues and Unauthorized Filings

• filing a bankruptcy case using false identity information
• filing multiple bankruptcies in different jurisdictions, with or without property identification, and
• filing a bankruptcy case on another's behalf without authorization.

Bribery and Embezzlement

• bribing a trustee or court official, and
• embezzling funds from a bankruptcy estate.

Federal prosecutors often add counts for other federal crimes along with bankruptcy fraud. For instance, the D.O.J. might prosecute someone for perjury who fails to list an asset on bankruptcy schedules. Also, prosecutions often include tax fraud, wire fraud, mail fraud, money laundering, bank fraud, identity theft, or conspiracy, each of which brings separate penalties.

The consequences of engaging in criminal bankruptcy fraud can be harsh. Anyone who makes a knowingly false statement in association with a bankruptcy filing can be assessed fines up to $250,000 and receive up to 20 years in prison. Learn more in Bankruptcy Fraud Consequences and Penalties.

Why Bankruptcy Fraud Must Be Intentional

Bankruptcy fraud doesn't happen by accident or mistake. You'll only run into trouble if it's believed that you knowingly and intentionally committed a fraudulent act.

For instance, accidentally forgetting to list an asset or incorrectly stating your income or expenses probably wouldn't be considered fraud, especially if you corrected the error as soon as you realized it occurred.

However, don't assume you can fail to list your vacation home in your bankruptcy paperwork without a problem. You could find yourself being charged with hiding an asset, filing a false form, and committing perjury.

Avoiding a Fraudulent Bankruptcy Accusation

Rest assured that it would be unusual for a debtor to face fraud allegations without warning. However, concerned bankruptcy filers can take steps to avoid fraud allegations by transparently disclosing financial information.

For instance, debtors should list all income, property, and creditors, even if they intend to repay the creditor after bankruptcy. Listing prior transactions, such as property sales, donations, and gifts, is also crucial. You can learn what you'll disclose by reviewing the official bankruptcy paperwork.

Consult a Bankruptcy Lawyer About Fraud in Bankruptcy

Most filers are fully aware of their past actions and know to expect a possible fraud accusation. If this is a concern, consult with a knowledgeable bankruptcy attorney.

Need More Bankruptcy Help?

Did you know Nolo has made the law easy for over fifty years? It's true, and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.