When you file for bankruptcy you are petitioning the US court system to assist you in resolving your financial woes. This is one of the many rights afforded to you as a US citizen.
Unfortunately, some people view the bankruptcy process as an opportunity to not only discharge their debts, but to walk away from events in a better position financially than before they filed for bankruptcy. Or in other words, to profit from their bankruptcy.
This, in essence, is what bankruptcy fraud means.
The Department of Justice knows that this type of fraud has existed as long as bankruptcy has been available. And this is exactly why bankruptcy judges watch for hints that fraud might be taking place in any given case.
So what exactly does a judge look for in these situations?
- Concealing Assets
This is one of the most common types of bankruptcy fraud, based on the assumption that you’re smarter than an experienced judge or trustee.
Concealing assets could involve gifting cash or jewellery to a family member in an attempt to have them excluded from your list of assets. Then once your bankruptcy is complete you would retrieve those assets from whoever was holding them.
If you are found to be concealing assets during your bankruptcy filing you can be sued by the bankruptcy trustee, and if found to be at fault your petition to have your debts discharged will be denied.
2. Undisclosed Income
Your bankruptcy petition requires a full and honest disclosure of your total income from all sources in order that your eligibility for bankruptcy be assessed.
Failure to disclose even a tiny amount of additional income from freelance or moonlighting work could be construed as an attempt to defraud the court.
The same rule would apply to any income earned through online source, like an Etsy store, for example. So it’s important that you include all sources of income in your filing, no matter how small.
3. Falsifying Records
The most obvious examples of this are making any type of false declaration in your bankruptcy filing i.e. you lie about your circumstances.
The other type of falsification most frequently prosecuted by bankruptcy judges is that of presenting false financial records to the court, or what is more commonly known as “cooking the books”.
These types of false financial records are typically used to hide certain assets or income. Bankruptcy judges take a very dim view of this type of behaviour, especially if a CPA was involved.
4. Credit Bust-out
A bust-out is a type of bankruptcy fraud planned well in advance of filing for Chapter 7 or 13, and not just an opportunistic notion like an attempt to conceal certain assets.
Most consumer credit bust-outs take the form of applying for and using a credit card to make expensive purchases several months before you knew you were going to file for bankruptcy.
The assumption is that the credit card spending spree will be discharged as an unsecured debt. Bankruptcy courts look for this type of financial activity in your disclosure, and if found will usually result in this particular debt not being discharged.
A more insidious form of credit bust-out involves starting a small business, and then building a line of credit with several distributors.
Once positive credit is established they then put in several large orders with distributors on 90-day payment terms. The orders are delivered and sold immediately at sale prices, while the business owner is filing for bankruptcy. The idea is to pocket the profits and have the businesses’ debts discharged under a Chapter 7 filing.
5. Commercial Bleed-out
Another form of bankruptcy attributed to business owners is a bleed-out.
The most common form of a bleed-out is where the business owner begins selling off assets to impartial third parties. But the third party is associated with the business owner, either as a family member or might even be an officer of the parent company.
A bleed-out can also take the form of an identical company (a parallel business) being set up by the business owner in advance of their bankruptcy filing.
Assets from the parent company are then sold to the parallel company under the guise of “raising operational capital”. The business owner waits for their bankruptcy filing to be complete, and goes back into business under a new name but with the same assets as before.
The above is a non-exhaustive list of the types of fraud bankruptcy judges have to deal with, but the examples we share here are also the most common.