On the spectrum of unlawful activities, bankruptcy fraud may not be the most egregious crime, but it it’s nevertheless a major transgression. Indeed, any belief that the police or courts view bankruptcy fraud as minor offense is absolutely false. It is a serious crime with severe penalties that can include incarceration.
Generally, there are four types of bankruptcy fraud: concealing assets, providing false information, multiple filings, and bribery. Let us briefly look at each one below.
Concealing assets is the most common type of bankruptcy fraud, and is committed by filers who want to prevent assets from being liquidated by creditors (via the trustee). Keep in mind that concealing assets is not limited to deliberately keeping them off a list of assets. Transferring assets (physical items or cash) to family members, friends, or any other party with the intention of circumventing the rules — and therefore breaking the law — qualifies as bankruptcy fraud.
Providing False Information
It is potentially a criminal offense to lie or withhold information on a bankruptcy filing that, if disclosed, would lead to adverse consequences for the filer (e.g. stating that annual income is lower than it actually is, in order to pass the Chapter 7 means test).
The word “potentially” is important above, because while making a mistake in a bankruptcy filing is obviously not something the courts treat lightly, they do realize that good-faith errors can happen. For example, a filer may legitimate forget that a relative owes them $1,000 for a loan that was made years ago.
As we have written about previously, a filer who notices an error, or who has an error brought to their attention, should immediately rectify it and explain the circumstances. Doing nothing and hoping that the error does not come to light is not just a bad idea, but it is technically illegal.
Even if the information is correct, it is a violation of bankruptcy rules to submit multiple bankruptcy filings in different jurisdictions (and if the information is false, then it would almost certainly meet the threshold for a criminal violation as well).
Bribery is arguably the most serious of all types of bankruptcy fraud, as it involves the criminality of someone with the power to influence a case, such as a court-appointed trustee. Keep in mind that bribery in this context is not limited to a cash transaction. Providing, or promising to provide, any benefit to a third party in exchange for an ill-gotten gain (regardless of the gain is ultimately realized it not) still constitutes fraud.
As noted above, the consequences of bankruptcy fraud are severe. Under U.S.C. Chapter 9, a conviction carries a sentence of up to five years in prison (not jail), and/or a fine up to $250,000. In addition, victims of bankruptcy fraud may also seek civil remedies to compensate them for their losses.
It goes without saying that you have no intention of committing bankruptcy fraud.
However, you may be concerned about making a mistake in your filing; you may be getting some potentially dubious advice from a family member, friend, or so-called “expert”; or you may have a family member or friend who you fear is about to make an extremely large and probably catastrophic mistake, and you want them to get a wise second opinion.