When filing for bankruptcy, you want to be honest and complete in your filings to prevent knowingly or unwittingly committing bankruptcy fraud, a serious crime that can carry some serious jail time.
As the number of people filing for bankruptcy increases, so also will the number of people committing bankruptcy fraud increase, according to experts. It’s estimated that about 10 percent of all bankruptcy filings contain some element of bankruptcy fraud. More than 1.4 million bankruptcies were filed last year, so by that estimate, there were more than 140,000 instances of bankruptcy fraud in 2009.
While bankruptcies and bankruptcy fraud may be on the rise, prosecutions of bankruptcy fraud are declining. In 2009, the government prosecuted the lowest number of bankruptcy fraud cases since 1986. While only a few people are prosecuted for bankruptcy fraud each year, you don’t want to be one of the ones that are. On top of the legal fees and restitution costs involved, the average person convicted of bankruptcy fraud serves about 36 months in federal prison for their crimes, according to U.S government statistical data.
Bankruptcy is a legal process that lets businesses or individuals with crippling debt to discharge their debts or repay them under modified conditions to make payment easier. Attempts to conceal assets in a bankruptcy proceeding constitutes bankruptcy fraud. If you’re charged with bankruptcy fraud and convicted, you can be fined up to $250,000 and be forced to serve up to five years in federal prison.
Types of fraud
In general, there are three forms of bankruptcy fraud: concealment of assets, multiple filings and petition mills. Concealment of assets is perhaps the most common form of bankruptcy fraud, and petition mills the most elaborate.
Concealment of assets, the most common method of fraud, is, as the name suggests, hiding your assets from the bankruptcy court. This form of bankruptcy fraud happens when the individual filing for bankruptcy protection hides assets during the bankruptcy proceedings to keep them from being sold off to repay creditors. There’s a variety of ways debtors can do this, including failing to list them on the assets declaration submitted to the court, transferring the assets to another party or moving assets into foreign accounts, such as bank accounts in Switzerland or the Cayman Islands. It’s estimated that concealment of assets accounts for nearly 70 percent of all bankruptcy fraud.
Multiple filing is another form of bankruptcy fraud. This occurs when an individual files for bankruptcy in more than one state. The individual will submit filings in more than one state, using incomplete lists of assets or fake names and information. The point of the multiple filings is to prevent the liquidation of non-exempt assets in a bankruptcy proceeding.
A petition mill is a form of bankruptcy fraud committed by a third party. In a petition mill scheme, the debtor is usually approached by a firm that offers to help them avoid eviction from their rental homes. The firm obtains the personal and financial information of the tenant, and then files bankruptcy, while still taking the tenant’s money. This drags out the process but brings no real benefit to the tenant, who often does not know that bankruptcy has been filed in his or her name.
The passage of new laws tightening up requirements to obtain a Chapter 7 bankruptcy, which discharges debts, have helped add to the number of bankruptcy cases. Under the new law, if you have disposable income of more than $183.50 per month, you have to file Chapter 13 rather than Chapter 7. Under Chapter 13, you’re forced into a repayment plan instead of having your debts forgiven after the sale of non-exempt assets (in many Chapter 7 cases, all the filer’s assets are exempt).
Why are there so few bankruptcy fraud prosecutions?
The truth is that if you commit bankruptcy fraud, you only have about a one in a thousand chance of being prosecuted. Bankruptcy fraud cases are tough to prove, and the federal government doesn’t have the time or resources to run down the hidden assets of every thousandaire who stashed a few bonds somewhere. Also, many of the trustees appointed by the federal government in bankruptcy actions don’t have the necessary expertise in tracking and recovering stolen assets. Bottom line: Unless you’re a high roller, and the government has a pretty good suspicion that you’re hiding assets, you most likely aren’t going to be prosecuted.
However, prosecutions of ordinary people do occur, and when they do, the courts come down hard on guilty parties. The benefits involved with committing bankruptcy fraud is not worth the potential risk to your finances and your freedom.