What Is Bankruptcy Fraud? 3 Common Examples.

3 Common Examples of Bankruptcy Fraud

Bankruptcy is designed to give the honest debtor a fresh start. In the eyes of the U.S. government, “honest” is a keyword. If a filer commits bankruptcy-related fraud, therefore, they will likely become ineligible for relief. They may even have to pay a fine of up to $250,000 and receive a prison sentence of up to five years.

Generally, bankruptcy fraud is when a person who files bankruptcy makes certain decisions that give them an unfair advantage. But this is a very broad definition, so what exactly will the court consider a crime?

Here are 3 common examples of decisions or actions that may result in an accusation of bankruptcy fraud.

1. Failing to Include All Assets on Your Petition

When you file your petition, you need to list every account and asset in which you have a legal interest. You will need to include everything, no matter how you acquired it. If the court discovers that you have excluded some of your property or funds, you may be accused of fraud.

Undervaluing property also counts as hiding assets. While you may not need to determine the exact dollar value of each possession you own, big differences will stand out and get you into trouble. If, for example, you own a vehicle that is worth $10,000, but you value it as $5,000, you may be accused of fraud.

Some people exclude assets or undervalue them because they are afraid they will lose those assets during the liquidation process. When you speak with your attorney, however, you may be surprised to learn that, like most people, you may not lose anything at all when you file bankruptcy.

2. Completing a Fraudulent Transfer

Instead of simply excluding an asset from their petition, some filers will transfer, gift, or sell their property to someone else so that it won’t be included in the bankruptcy estate.

The court may consider this action a fraudulent transfer if the filer:

  • Sold the property for less than the fair market value
  • Transferred or gifted the property to a close friend or family member
  • Legally transferred or gifted the property while still using it or keeping it
  • Failed to disclose the transfer to the court
  • Went into debt immediately after the transfer

These transfers are particularly risky if the property would have been liquidated by the trustee. This is because a pre-bankruptcy transfer would allow a person to sell their nonexempt property and keep the proceeds, while the bankruptcy liquidation process would have sold the property and given the proceeds to the debtor’s creditors.

Generally, the trustee will examine any transfers or sales you made in the two years before you filed your petition. Depending on state law, they may be able to go back further. Trustees also have the authority to undo fraudulent transfers, meaning they will seize either the property you sold or its value.

3. Accumulating Debt with the Intention of Discharging It

Some make the mistake of maxing out their credit cards immediately before filing bankruptcy, believing they can keep everything they purchased while discharging the debt they incurred. This tactic, however, is considered fraudulent, and your creditor may object to the discharge if they believe you borrowed from them without intending on paying them back.

A Note About Intent

Typically, a person needs to intentionally commit the above actions in order to be convicted of fraud. But you are also required to complete forms carefully and make a good faith effort to repay your debt. So, while you may be forgiven for forgetting to list one small asset, it will be difficult to argue that you presented misinformation on accident if the court discovers several substantial errors.

To minimize the risk of a fraud accusation, work closely with an attorney at every point in your case. They can help you take the necessary steps before filing bankruptcy, complete all documentation thoroughly and accurately, and maximize the benefits of this powerful debt-relief process.

Buchalter & Pelphrey Attorneys At Law provides bankruptcy and other debt-related services backed by more than 45 years of legal experience. The attorneys represent both consumers and businesses as they utilize various debt-relief strategies to regain their financial footing and build a more secure future. If you would like more information about bankruptcy or guidance as you begin your process, give us a call at (321) 320-6088 or contact us online. Your initial consultation is complimentary.

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