Bankruptcy fraud is defined as defrauding a bankruptcy court and one’s creditors when seeking debt relief or making a repayment plan. An individual, spouses, a corporation or another entity can engage in bankruptcy fraud.
All bankruptcy cases are handled in federal bankruptcy courts. This means that any type of bankruptcy fraud, from making a false statement on a form to concealing property, can be prosecuted as a federal crime.
Rates of Bankruptcy Fraud
The U.S. Trustee Program, a division of the U.S. Department of Justice (DOJ), made 2,244 bankruptcy and bankruptcy-related criminal referrals during fiscal year 2021.
The total number of bankruptcy filings in September 2021 was 434,540.
This means that bankruptcy fraud is rare – only 0.51 percent of bankruptcy filings were suspected of criminal activity in 2021.
The 2021 number of criminal referrals represents a 9.8 percent decrease from the 2,489 criminal referrals during fiscal year 2020. The decline may be attributable to the lower rate of bankruptcy filings during the first year of the COVID-19 pandemic.
Number of Bankruptcy Fraud Cases Prosecuted
As of August 31, 2022, DOJ had filed formal criminal charges in connection with 15 referrals. It declined prosecution for 992 referrals, administratively closed four cases, and kept 1,233 of the referrals for review or investigation.
Common Types of Bankruptcy Fraud
The five most common allegations in fiscal year 2021 for criminal referrals were:
- Tax fraud.
- False oaths or statements.
- Identity theft or use of false/multiple Social Security numbers.
- Bankruptcy fraud scheme.
- Concealment of assets.
The U.S. Federal Bureau of Investigation (FBI) is the primary investigative agency that addresses bankruptcy fraud. The FBI has reported most of its bankruptcy cases involve people who:
- Lie under oath or provide false documents during bankruptcy proceedings.
- Conceal or transfer financial assets.
- Commit tax fraud.
Methods of Tax Fraud
Common methods of tax fraud include:
- False exemptions or deductions.
- False or altered documents.
- Failure to pay tax.
- Unreported income.
- Organized crime.
- Failure to withhold taxes.
- Other failures to follow state or federal tax laws.
Signs of Bankruptcy Fraud
Since an individual, couple, company or other entity can commit bankruptcy fraud in different ways, signs of bankruptcy fraud vary considerably. Documents or evidence that suggest inconsistencies or false statements are signs of fraud. Activities that raise suspicion about the transfer of property or assets also may be signs of fraud.
Common signs of bankruptcy fraud are:
- False statements on bankruptcy petition or related documents submitted with the petition, including misstatements as to income, expenses, debts, value of personal and real property, dates, and injuries or illnesses.
- Evidence of concealed assets.
- Evidence of unreported or underreported income.
- Evidence of the undervaluation of assets.
- Evidence of omitted assets or claims.
- Suspicious transfers of assets.
- Use of credit cards to pay for pre-bankruptcy (petition) filing expenses.
- Frequent delays in payments to creditors and employees.
- Frequent changes in credit cards or methods of payment.
- False statements on a loan application.
- Frequent changes in key staff.
For companies or entities, additional signs of fraud include:
- Warehouses full of inventory, but no sales.
- Many movements of goods and assets.
- Sudden drops in sales or profits.
- Sudden sell-off of assets.
- Higher number of liabilities than assets.
- Lack of corporate or organizational bank account.
- Leaders with history of running bankrupt companies or entities before.
Common Methods of Bankruptcy Fraud
A creditor can be guilty of bankruptcy fraud by demanding more than the amount they are owed or by submitting falsified documents to a bankruptcy court. The FBI notes that common methods of bankruptcy fraud include:
- Using false identities to file for bankruptcy more than once, in different locations.
- Bribing a bankruptcy trustee, the individual appointed by the U.S. trustee program to handle the bankruptcy estate, the debts and assets of the petitioner.
- Intentionally running up credit card bills with no intention of paying them off.
The FBI reports that bankruptcy fraud is often committed together with other crimes such as credit card fraud, identity theft, mortgage fraud, money laundering, and mail and wire fraud. Signs of other types of fraud are a tipoff that the offender may also be committing bankruptcy fraud.
Trustee Fraud as a Financial Crime
A bankruptcy trustee is the person appointed by the U.S. Trustee program to sell the bankruptcy estate’s property and distribute the proceeds to creditors. A trustee commits fraud if they embezzle or steal from the estate. This includes paying an illegal fee to the trustee.
Criminal penalties for a trustee depend on the number of instances of bankruptcy fraud and the amounts that were misappropriated.
Charges for Bankruptcy Fraud Under Federal Law
An individual who engages in fraud in connection with a Chapter 11 bankruptcy, also known as reorganization bankruptcy, can suffer a penalty of up to five years of incarceration and a fine up to $250,000.
If a person commits other wrongful acts, such as obtaining money in connection with fraud in a bankruptcy case, they could face up to 20 years of incarceration in federal prison. An offender will lose their right to discharge their debts and lose exemptions on exempt property.
The penalty for corporate or organizational fraud can be dependent on the amount of the fraud and the number of instances of fraud. An offender in a bankruptcy case can also be sued by their creditors in civil court.
How to Prove Bankruptcy Fraud
A person who suspects bankruptcy fraud should report signs of bankruptcy fraud and the name of the suspected person, couple or entity to the DOJ or FBI. They should not attempt to investigate another party’s fraud themselves.
If the offender is convicted and sentenced for bankruptcy fraud, the person defrauded can submit the conviction as evidence in a civil case for damages against the offender.
How to Avoid Bankruptcy Fraud
A person, couple or entity filing for bankruptcy can avoid bankruptcy fraud by talking with a bankruptcy attorney about why they are filing a petition. They should be filing for legitimate reasons, such as wanting to borrow money while reorganizing their business.
Further, the petitioners should allow their attorney to review the documents they will submit to the court. Attorneys can review these for accuracy and concerns such as omissions or mismatches in dates.
Petitioners should make sure their attorney is a member in good standing of their state’s bar association and has practiced in bankruptcy court prior to their case.
If a person is representing themselves in bankruptcy court, they should make sure that they complete all forms and documents required by the court. They should be mindful of the submission deadlines.
A person who files without an attorney is responsible for knowing and following all of the legal requirements to file their petition in bankruptcy court.
- U.S. Courts: Bankruptcy
- U.S. Federal Bureau of Investigation: Bankruptcy fraud
- IRS.gov: How Do You Report Suspected Tax Fraud Activity?
- U.S. Department of Justice: Criminal Referrals by the United States Trustee Program Fiscal Year 2021
- U.S. Courts: Bankruptcy Filings Continue to Fall Sharply, November 8, 2021
- U.S. Code: Title 18, Crimes and Criminal Procedure
- U.S. Bankruptcy Court, Southern District of Ohio: Submit a Petition Package Online
Jessica Zimmer is a journalist and attorney based in northern California. She has practiced in a wide variety of fields, including criminal defense, property law, immigration, employment law, and family law.