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Criminal Law Newsletter

Defrauding Creditors in Bankruptcy

Bankruptcy fraud has become a common way for debtors to abuse and manipulate a system that was intended to help the truly indebted manage overwhelming financial liability. Considered to be both a civil and a criminal offense, committing fraud in bankruptcy violates the United States Code, and could lead to the offender being fined and/or imprisoned for up to five years.

Some of the most common types of bankruptcy fraud include:

  • Concealment of assets
  • Petition mills
  • Multiple filings
  • Making false statements
  • Attorney fraud
  • Forged filings
  • Embezzlement
  • Credit card fraud

Concealment of Assets

Under Title 18 of the United States Code Section 152, it is a crime for any person to “knowingly and fraudulently” conceal any property from a bankruptcy trustee, in connection with a bankruptcy case.

Concealing assets from a bankruptcy trustee is the most common way that debtors commit bankruptcy fraud. As filing for Chapter 7 bankruptcy discharges a debtor’s liability in exchange for the debtor’s property (which is liquidated by the bankruptcy trustee to pay off the debtor’s creditors), some Chapter 7 debtors will fail to list certain assets on their bankruptcy schedules in order to avoid the liquidation of their property. In fact, debtors who conceal several assets from a bankruptcy trustee might have their debt discharged and continue to live an extravagant lifestyle.

Petition Mills

Petition mills prey upon poor or immigrant communities. When an individual is facing financial difficulty and facing eviction, the individual will respond to an advertisement for a “typing service” promising to assist with stopping the eviction. Unbeknownst to the individual, the service files a petition for bankruptcy on the individual’s behalf, placing an automatic stay on the eviction process, but ultimately charging the individual an exorbitant fee for merely postponing the inevitable eviction.

Multiple Filings

Filing for several bankruptcies at the same time is a common type of bankruptcy fraud. Debtors will sometimes file for bankruptcy in different states, listing the same assets and liabilities in each filing, then absconding with certain assets left off of a particular bankruptcy petition. Similarly, some debtors will use false names and/or Social Security Numbers to file several bankruptcies in the same state, traveling to another state to file for another bankruptcy if they fear that they will be caught.

Enforcement of Bankruptcy Fraud

Enforcement of bankruptcy fraud falls within the exclusive jurisdiction of the FBI. The FBI gives bankruptcy fraud investigations high priority and focuses such investigations on the following:

  • Individuals and businesses who conceal assets
  • Eliminating petition mills that prey upon poor or immigrant victims
  • Targeting individuals who file multiple interstate bankruptcy filings
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