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Phone: 805.492.7045
Due to precautions related to COVID-19, we have expanded our options for remote consultations. Please contact our office to discuss whether a full phone consultation or video conference is appropriate for your situation.

Bankruptcy Fraud

Filing bankruptcy can be a big relief to those who have become overwhelmed with bills or have faced difficult circumstances which have made it difficult to pay all of their debts according to the original agreements they made with their creditors.

Bankruptcy can reorganize and even forgive many debts, and give the filer an opportunity to set the reset button on their finances.

When you file bankruptcy, the process requires that you lay all your cards on the table. You have to be honest about what you have, and what you owe. This means you have to list all of your property, and you must also list any property that has been transferred to other people in the recent past.

If you do not follow these rules when you file for bankruptcy, you may be accused of bankruptcy fraud. In the most common types of personal bankruptcy, Chapter 7 and Chapter 13 a bankruptcy trustee is appointed to evaluate debts and assets.

Failure to disclose something you owe or something you have given them an incomplete picture of what you have and inhibits their ability to assess what you can or cannot pay.

Bankruptcy Fraud in Chapter 7

Chapter 7 bankruptcy is often referred to as a debt forgiveness bankruptcy. Debt is discharged relatively soon after filing, Filers that meet income and property ownership guidelines in order to qualify for a Chapter 7 filing. If they have too many assets or make too much money, they do not qualify for this type of bankruptcy.

Chapter 7 allows the filer to keep a modest amount of assets but liquidates the rest in order to pay creditors as much as possible. Fraud may occur by falsifying either assets or income in order to make it appear that the filer meets the qualifications, even if they do not.

In addition to looking at what the filer owns at the time of filing, the court looks at what they owned recently and either gave away or sold. Real estate is a common point of contention in Chapter 7 bankruptcy fraud cases because owning property can tip the scales and disqualify you from Chapter 7 in some cases.

If it is a vacation home, it will likely be liquidated. Selling the property close to the time of bankruptcy, especially to someone, such as a close friend or relative, who may allow you to use it may be seen as fraudulent, especially of the sale was not made at fair market value.

Bankruptcy Fraud in Chapter 13

Chapter 13 Bankruptcy is a reorganization of debt, and there is more flexibility regarding what you get to keep or how much money you can make.

This is because debt is not canceled it is reorganized. Your bankruptcy trustee pools all your debt and looks at your assets and income and determines what you should be able to pay monthly for the next 3-5 years, depending on your circumstances.

The bankruptcy is active during that time, and at least a portion of each debt is expected to be paid. Not disclosing debt can skew the calculation and make you subject to perjury, as well as fraud charges.

Penalty for Bankruptcy Fraud

Bankruptcy fraud Penalty

The conditions of bankruptcy fraud are outlined in Section 523 of the Bankruptcy Code, which explains that debts cannot be discharged under false pretenses, with false representation, or due to fraud.

This means the attempted bankruptcy will be thrown out of court, and the filer will retain liability for all debts.

The filer’s assets are liquidated in order to pay off as much of their debt as possible. In addition to losing the ability to file bankruptcy, there may also be legal action taken against the filer that may include fines up to $250,000 and five years in a federal prison.

The bankruptcy fraud laws are there to keep people from intentionally cheating their creditors, so honest mistakes are unlikely to have serious consequences, so long as you own up to your mistake.

The mistakes may still be costly. The court will want an explanation and your bankruptcy filing may be delayed, which can still be costly.

How to Report Bankruptcy Fraud

How to report bankruptcy fraud

Report to U.S. Trustee program with the U.S. Department of Justice. In order to allow for a thorough investigation it is important to provide as much information as you can, including

  • Who you suspect is committing fraud
  • The case number and location of filing
  • A brief description of the fraud and how you became aware of it
  • What you know about the asset(s) concealed and their value
  • Your name and contact information, if you are willing.

Identifying yourself is not required, however, the investigation will be more smooth if the Justice Department has your information handy in order to contact you with any questions.

A Legitimate Bankruptcy Filing Can Help Your Financial Future

Discussing the possibilities and penalties of bankruptcy fraud is not meant to discourage bankruptcy as on option for those who truly need that lifeline in their financial lives. Nathan A Berneman, APC is a bankruptcy attorney in Los Angeles, CA that can help assure that you recall all your debts and assets in your bankruptcy case, and help you determine which type of bankruptcy will serve you best in your situation. To learn more on your financial options, contact us at 805-492-7045 for a free consultation.

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