What is Bankruptcy Fraud? (And How to Protect Yourself)

Bankruptcy is an orderly process for dealing with debt when a person lacks the resources to pay back what they owe. Once a debtor files for bankruptcy, no creditor can take any action to collect on the debt. Instead, the debtor’s assets become part of the bankruptcy estate. The trustee then makes sure that creditors are treated equally. In aChapter 7 bankruptcy, the trustee can take any non-exempt asset and give it to creditors or sell it and distribute the proceeds.

Unfortunately, some debtors use bankruptcy for illegal reasons. They might fail to accurately report all assets out of a desire to protect them from the trustee. Other debtors transfer an asset to a friend or family member so they can keep it out of the bankruptcy estate. At Resolve Law Firm, we take bankruptcy fraud seriously because the government does. In this article, our San Francisco bankruptcy attorney takes a closer look at bankruptcy fraud and its consequences.

Examples of Bankruptcy Fraud

Most debtors in bankruptcy are very honest when they file. They report all assets as required on their bankruptcy paperwork. However, some people end up lying or misrepresenting certain aspects of their financial situation, which might constitute fraud.

Here are some examples of bankruptcy fraud.

Fraudulent Transfers

Under11 USC § 548, a fraudulent transfer is any transfer a debtor makes with the intent of delaying, hindering, or defrauding a creditor. For example, a debtor cannot transfer their house to a sister so that it is outside the bankruptcy estate, with the intent of then getting back the house when the bankruptcy is completed. That type of intentional attempt to defraud creditors is illegal.

Another type of fraudulent transfer involves transferring an asset for less than reasonably equivalent value. For example, a debtor might sell their new car for only a few thousand dollars right before filing for bankruptcy. The statute defines this transfer as fraudulent, even though there’s no showing of the debtor’s intent to defraud.

Both types of transfers are fraudulent under federal law. The bankruptcy trustee can avoid these transfers—essentially, claw back the asset and add the asset to the bankruptcy estate.

Concealing Assets

Debtors must fill out detailed schedules as part of their bankruptcy. These schedules list every asset the debtor owns. You might have failed to list a bank account with cash in it, a motor vehicle, or some other asset. Some people have accounts offshore or in a different state, which they don’t report.

Intentional concealment of assets is fraudulent. The trustee, if they find out about it, will definitely get control of the assets and include them in your bankruptcy estate. You could also face criminal charges.

Falsifying Records

It’s fraudulent to submit falsified records to the bankruptcy court. For example, some people might falsify bank records to show they have less money in the account than they do, or they falsify a deed or title to show someone else owns an asset. It is illegal to submit falsified records to the bankruptcy court.

Misrepresentations in Your Bankruptcy Filing

Not all inaccurate information is intentional. You might have simply forgot about an account your mother left you in her will, so you neglect to report it. This type of “innocent” mistake isn’t necessarily fraud. To face criminal charges, there’s a higher standard, usually requiring knowledge that you made a false statement.

Still, any inaccurate information will raise eyebrows. The trustee might assume you intentionally withheld assets, especially if the asset is worth a lot of money. It’s one thing to forget to include an old checking account with $500 in it. Quite another to forget to mention a bank account with $100,000 in it.

Ideally, your filings with the court should be free of errors, innocent or otherwise. There’s no reason to give the court or trustee a reason to suspect you are falsifying records.

Will You Face Criminal Charges?

It depends on the type of fraud. Federal law allows the government to prosecute someone for knowingly and fraudulently:

• Making false declarations;
• Concealing assets;
• Receiving property with the intent of defeating bankruptcy protections.

Criminal convictions require showing a defendant knew they were making misrepresentations, as well as an intent to defraud. That means that innocent mistakes which are truly innocent will not qualify.

Protect Yourself: Hire a Lawyer!

Most people who submit false information do so accidentally. They have no intent to defraud anyone. They simply forgot about property that they own or money in a bank account which they haven’t touched in years.

As mentioned above, you probably won’t face criminal charges for innocent mistakes. Nonetheless, why make things hard on yourself? A trustee will become suspicious if you forget to list assets, and they could open an investigation. They might refer your case to the Department of Justice.

You can avoid these headaches by hiring an experienced lawyer with Resolve Law Firm. We protect clients by:

• Decide whether filing for bankruptcy is the correct choice depending on your financial situation;
• Help you avoid making an accidental fraudulent transfer before filing for bankruptcy;
• Fully review all of your assets as part of your bankruptcy estate;
• Correctly and fully fill out bankruptcy schedules and other court filings;
• Help clients amend filings if they accidentally forget to include information;
• Represent you in court hearings and in communications with the bankruptcy trustee;
• Attend a Meeting of Creditors with our clients;
• Shepherd your bankruptcy case toward resolution and the discharge of your debts.

Call us. Your case is in good hands. We have helped countless debtors navigate the bankruptcy system, and we know what information is required to file.

We Offer a Free, 30 Minute Consultation!

Innocent mistakes slow down the bankruptcy process, delaying your chance at financial freedom. Get the legal help you need. Whether you are filing for Chapter 7 or Chapter 13 protection, Resolve Law Firm can help. A San Francisco bankruptcy lawyer is standing by to take your phone call or text.