How to File Bankruptcy

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.

Filing for bankruptcy can be a very stressful and emotionally draining experience for individuals and families. Although bankruptcy can provide relief from the pressures and stresses created by overwhelming debt, many people see it as an admission of failure. Streamlining and making filing for bankruptcy as smooth as possible can help prevent additional angst and turmoil.

More than 1 million Americans filed for bankruptcy last year, and the number of people filing personal bankruptcies has trended upward in recent years because of the poor economy and other factors, such as growing health care costs.

When filing or bankruptcy, it’s important to file for the type of bankruptcy that’s most appropriate to your individual circumstances and to make sure all paperwork is filed correctly. A botched bankruptcy could see you pay more than you ought to in debt repayments and attorneys’ fees or lose property that, had the bankruptcy been filed correctly, you would have been able to retain.

When should I file for bankruptcy?

Bankruptcy has some long-lasting consequences. It stays on your credit report for 10 years, and some employers ask whether you’ve filed bankruptcy on employment applications.

Before filing bankruptcy you should consider other alternatives such as debt consolidation or selling assets to pay off your debts. However, if you’re beset with outrageous medical bills, or if your debts will prevent you from retiring or being able to fund your children’s college education, you may want to consider bankruptcy as a way to get a fresh start.

Current bankruptcy law requires debtors to seek credit counseling at their own expense before filing for bankruptcy. While this adds to the cost of filing for bankruptcy, a credit counselor can help you determine whether bankruptcy is the solution to your problems and what type of bankruptcy you should file.

Hire an attorney

Thinking about representing yourself in bankruptcy court? Don’t do it. Unless you’re a financial or legal genius, you shouldn’t be representing yourself in bankruptcy court. Think you’re a genius? Then why are you bankrupt?

The fact of the matter is that bankruptcy forms are incredibly complicated, and they’re specifically designed that way by the federal government to discourage bankruptcy filings. Screwing up these forms could cost you in additional debt payments, or losing exemptions that could result in you having to sell property to settle your debts that you otherwise could have kept. Save yourself a lot of grief and expense. Bite the bullet and hire a competent bankruptcy attorney.

Paying for it

Silly as it sounds, it costs money to go broke. Court fees for Chapter 7 and Chapter 13 bankruptcies, the most common personal bankruptcies, are $200 and $185. The average attorney’s fee for bankruptcy work is $1,700, but this can vary by state and municipality. In some areas, if your case is desperate enough, you may be able to obtain help from a legal aid or other social services organization.

You may want to cease payment on some debts as you prepare to go into bankruptcy in order to raise the necessary cash. Be warned, however. Don’t run up any new debts, as you may be sanctioned by the court for taking on debts you had no intention of repaying.

Choosing your chapter

Once you’ve met with the credit counselor and hired an attorney, you’ll need to chose which chapter of the bankruptcy code you’ll be filing under. Most personal bankruptcies are filed under Chapter 7 or Chapter 13. Under a Chapter 7 bankruptcy, your personal assets not covered by exemptions are sold off to pay your debts. Whatever’s not paid off is written off by your creditors, except for certain debts such as child support and student loans. Under a Chapter 13 bankruptcy, your debt is reorganized and you’re placed in a three to five year repayment plan. The benefit of a Chapter 13 bankruptcy is that it often reduces the amount you have to pay back to your creditors. Once the three to five years is up, your remaining debt, save for things like child support and student loans, is discharged.

Under a recently passed federal law, there’s a means test to determine who can file Chapter 7 bankruptcy. Folks who have too much income for a Chapter 7 bankruptcy are instead allowed to file a Chapter 13 bankruptcy.

For farmers and fishermen, Chapter 12 bankruptcies are also available. These bankruptcies resemble Chapter 13 bankruptcies, but are specifically tailored to the needs of farmers and fishermen.

Going to court

Once your attorney files your petition for bankruptcy, the court will appoint a trustee and you’ll be called in for what’s known as a first meeting of creditors. In all actuality, this will be a 10 minute meeting between yourself and the trustee in which you’ll talk about your debts and assets and swear to the validity of paperwork describing your debts and assets that has been submitted to the court. The trustee will take your information and determine what assets, if any, can be sold to repay creditors, or, in a Chapter 13 case, work out how much you should pay back your creditors. After the meeting, your creditors will have 60 days to challenge the discharge of your debts or your debt repayment plan. After that, your debts will either be discharged in a Chapter 7 case, or you’ll begin your repayment under a Chapter 13 bankruptcy.