- 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 individuals files multiple times using either false information or real information in several jurisdictions.
- An individual bribes a court-appointed trustee.
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, he 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 passes 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 his behalf, the petition mill actually files for bankruptcy in his name and drags out the proceeding and charges him 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 aren't criminal, they may still violate bankruptcy provisions, and they are often used to provide cover for a debtor trying to conceal assets.
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 knowingly1 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.2
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was meant in part to reduce the instances of bankruptcy fraud and abuse. Supreme Court case Ransom v. FIA Card Services addressed the "means test" which the Act imposed on someone filing for a Chapter 13 bankruptcy.
Last updated in July of 2017 by Stephanie Jurkowski.
Federal Judicial Decisions
- Important U.S. Circuit Courts of Appeals Decisions:
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