Between July 1, 2017 and June 30, 2018, more than 750,000 Americans filed for bankruptcy under Chapter 7 or Chapter 13 for nonbusiness debts, including nearly 65,000 here in California. Almost all of those people are honest hardworking Americans, and for them the bankruptcy process represents a welcome reprieve from overwhelming debt and overbearing debt collectors.
But for a very small subset of those that file, bankruptcy is a tool for committing fraud. Whether by running up credit card debt with no intention of ever repaying it, hiding assets from the bankruptcy court and creditors in an effort to keep them, or using bankruptcy to hide other types of fraud, these individuals abuse the bankruptcy process for illicit personal gain.
The consequences for such behavior are severe, ranging from denial of a bankruptcy discharge to prosecution for a federal felony. Even inadvertent mistakes when filing bankruptcy may lead creditors or the bankruptcy trustee to allege fraud, prolonging the bankruptcy process and making it significantly more complicated and stressful.
To help our readers understand the importance of being honest and transparent when filing for bankruptcy, this post describes some common forms of bankruptcy fraud and the potential consequences dishonest filers (or creditors, for that matter) face.
Article at a Glance
- Dishonesty in the bankruptcy process comes with a heavy cost—emotionally, legally, and financially.
- Bankruptcy fraud is a federal felony punishable by up to 5 years in prison and up to $250,000 in fines.
- To help avoid allegations of dishonesty in the bankruptcy process, you should work with a knowledgeable bankruptcy attorney who can make sure the information you provide to the court is accurate and complete.
Common Types of Bankruptcy Fraud
Technically speaking, bankruptcy fraud is a particular type of crime—see below for more information. But more generically, bankruptcy fraud can refer to any type of dishonesty in the bankruptcy process. Some common types of bankruptcy fraud include:
- Running up credit card debt with no intention of paying it back. This is a type of fraud that occurs even before you file for bankruptcy. If you’re considering bankruptcy, stop using your credit cards and stop taking on debt.
- False oaths or statements. Your bankruptcy filings are made under penalty of perjury. By signing them, you signify that the information you’ve provided is “true and correct.” Likewise, when you participate in a 341 hearing, you will be placed under oath. You can be prosecuted for perjury for making false statements in either context.
- Hiding assets. When you file for bankruptcy, you are required to list all of your assets, exempt and non-exempt Don’t exclude some of your property—like bitcoin—because you think it can’t be discovered (it can), and don’t try to hide property by moving it out of state or engaging in fraudulent transfers.
The Impacts of Dishonesty in Bankruptcy
Dishonesty in the bankruptcy process can affect your case in several ways. First, if the trustee or your creditors suspect that you have committed bankruptcy fraud, they can file an adversary proceeding. The goal of an adversary proceeding is to deny you at least some of the benefits of bankruptcy.
For example, a creditor may challenge your right to receive a discharge of one or more of your debts. Or the bankruptcy trustee may challenge your right to file bankruptcy under Chapter 7 and ask the court to convert your case to Chapter 13.
Whatever the reason for an adversary proceeding, the bankruptcy court has several tools at its disposal for dealing with bankruptcy fraud, including:
- Denying a discharge of some, but not all, of your debts. In some cases, the bankruptcy court may order the discharge of most of your dischargeable debts, but deny it for others.
- Denying a discharge of all debts. Alternatively, the court may deny your discharge altogether, defeating the purpose of having filed bankruptcy to begin with.
- Converting your case to another chapter. If you file under Chapter 7, and the court later determines that you are not eligible for Chapter 7, it may convert your case to a Chapter 13 bankruptcy. In that event, rather than receiving your discharge in a matter of months, you’ll have to make payments on your debts for several years before they are discharged.
- Dismissing your bankruptcy case. In some circumstances—particularly those involving intentional dishonesty—the court can dismiss your bankruptcy petition. If it does so “with prejudice,” you will be unable to file bankruptcy again for a specified period of time.
As serious as these consequences are, they are a slap on the wrist compared to another penalty for dishonesty in bankruptcy: prosecution for a federal crime.
Bankruptcy Fraud is a Federal Felony
18 U.S.C. § 152 makes it a federal crime to knowingly and fraudulently do any of the following in a bankruptcy case:
- Conceal assets;
- Make a false oath or account;
- Make a false statement under penalty of perjury;
- Make or offer a bribe; or
- Conceal, destroy, or falsify financial records.
And, although we’ve been using the phrase “bankruptcy fraud” in a general sense to refer to all kinds of dishonest behavior in the bankruptcy process, that’s actually the name of a specific type of crime defined in 18 U.S.C. § 157. That section makes it a crime to use a bankruptcy filing to commit or conceal a “scheme or artifice to defraud.”
For example, section 157 has been used to prosecute businesses that promise consumers help avoiding eviction when they are unable to pay their rent, but secretly just file bankruptcy in the consumer’s name, abusing the automatic stay to temporarily prevent eviction.
A person convicted under either of these sections can face up to five years in prison, fines of up to $250,000, or both.
In Bankruptcy, Honesty is the Best Policy
Whenever you’re dealing with the government—or engaging in any kind of financial transaction, for that matter—honesty is critical. Bankruptcy combines those two areas, making total honesty and transparency all the more important.
Of course, most people who file for bankruptcy are honest, but opportunistic creditors won’t always see it that way. They may latch onto any misstep in the bankruptcy filing process and claim it shows an intentional effort to abuse the system.
For help ensuring that your bankruptcy filings are accurate and complete so you can avoid even the appearance of dishonesty, you should work closely with an experienced bankruptcy attorney. If you live in Los Angeles or elsewhere in Southern California, you can contact one of the attorneys at Borowitz & Clark today for more information and to schedule a free consultation.