bankruptcy fraud

Bankruptcy fraud is a white-collar crime that commonly takes four general forms:

• A debtor conceals assets to avoid having to forfeit them.
• An individual intentionally files false or incomplete forms. Including false information on a bankruptcy form may also constitute perjury.
• An individual files multiple times using either false information or real information in several jurisdictions.
• An individual bribes a court-appointed trustee.
• Commonly, the criminal commits one of these forms of fraud with another crime, such as identity theft, mortgage fraud, money laundering, and public corruption.

Common Forms of Fraud

Nearly 70% of all bankruptcy fraud involves the concealment of assets. Creditors can only liquidate assets listed by the debtor; thus, if the debtor fails to reveal certain assets, they can fraudulently keep them despite owing an outstanding debt. For further concealment, the debtor might transfer undisclosed assets to friends, relatives, or associates so it cannot be found. Fraudulent concealment makes loans more expensive, because it raises the risk and costs associated with lending and creditors pass those costs on to other hopeful borrowers.

Petition mills are one type of bankruptcy fraud scheme on the rise in the United States. Petition mills pass themselves off as consulting services, purporting to help tenants experiencing financial difficulties avoid eviction. While the tenant believes the service is negotiating on their behalf, the petition mill actually files for bankruptcy in their name and drags out the proceeding and charges them exorbitant fees. The tenant is left with no savings and a credit score in ruins.

Multiple filing fraud occurs when a debtor files for bankruptcy in multiple jurisdictions, using the same name and information, using aliases and false information, or using some combination of real and false information. Multiple filings clog up the bankruptcy court's docket, which slows down the whole process, including asset liquidation. Although multiple filings are not criminal, they may still violate bankruptcy provisions, and they are often used to provide cover for a debtor trying to conceal assets.

Legal Consequences

Federal prosecutors can bring criminal charges for suspected bankruptcy fraud under 18 U.S.C. Chapter 9. Proof of fraud requires a showing that the defendant knowingly and fraudulently misrepresented a material fact. Bankruptcy fraud carries a sentence of up to five years in prison, or a fine of up to $250,000, or both. Even just intending to commit bankruptcy fraud may be punishable.

Federal Statutes

• 18 U.S.C. § 1344: Bank Fraud
• 18 U.S.C. §§ 151-152: Bankruptcy Definition and Fraud

Federal Judicial Decisions

• Important U.S. Circuit Courts of Appeals Decisions:
  • United States v. Hughes, 401 F.3d 540 (4th Cir. 2005).
  • United States v. Butler, 211 F.3d 826 (4th Cir. 2000).
  • United States v. Ladum, 141 F.3d 1328 (9th Cir. 1998).
  • United States v. Levine, 970 F.2d 681 (10th Cir. 1992).
  • United States v. Gibbs, 594 F.2d 125 (5th Cir. 1979).

Useful Internet Sources

• IRS: Examples of Bankruptcy Fraud Investigations - Fiscal Year 2016, 2017
• Credit Research Foundation: Identifying Bankruptcy Fraud
• U.S. Department of Justice: Fraud Section
• Federal Bureau of Investigation: White-Collar Crime
• U.S. Department of the Treasury: Financial Crimes Enforcement Network
• National White Collar Crime Center

[Last updated in July of 2022 by the Wex Definitions Team]