Americans have the right to avail themselves of an often-undervalued safety net: bankruptcy protection. Whether you struggle with insufficient income, an expensive health crisis, a divorce, or just a history of bad financial choices, the financial relief you’ll get from bankruptcy is life-changing.
But, to receive this relief, you must avoid bankruptcy fraud. What is bankruptcy fraud? How does it happen before, during, or even after your case? What could happen if you are accused of bankruptcy fraud? And, most importantly, how can you avoid it? Here’s what every debtor needs to know.
What Is Bankruptcy Fraud?
Bankruptcy fraud can take a number of forms, but it boils down to intentionally providing inaccurate information to the bankruptcy court in an effort to circumvent the law. Fraud is different from mistakes and accidental omissions. It must be intentional. Misstating your average salary or forgetting a single asset on a form isn’t likely to rise to the level of fraud, but it may cause the trustee to investigate further.
How Is Bankruptcy Fraud Committed?
As mentioned, fraud in bankruptcy can take many forms. It may start in the period before you file. A debtor might try to avoid losing an asset by transferring it or selling it at a deep discount to a friend or relative before they file. The bankruptcy court can look back at transactions that occurred up to two years ago to see if you’ve done anything like this.
Preferential payments before bankruptcy mean paying some of your creditors while not paying others. For instance, you might pay back a loan from your sibling because you care about them more than you do your credit card company. However, the bankruptcy process considers all these unsecured creditors equal and can even ask that person to repay the money.
Finally, some debtors might take on debt knowing that it will be discharged in bankruptcy—a practice called presumptive fraud. They may charge up their credit cards or take out a cash loan and spend it shortly before filing their petition. Luxury goods, big cash advances, and expensive vacations all catch the attention of the bankruptcy trustee.
During the bankruptcy process, fraud happens by intentionally omitting certain information (such as your vacation property or an expensive car you’re hiding) on forms in your petition. A petitioner might destroy records of some asset or questionable transaction, provide false income or asset details, or lie to the court or the creditors during their meeting.
Once your case is complete, though, fraud can still cause problems. If a creditor only learns about fraud after the discharge of debts, they can petition the bankruptcy court to reverse or revoke your discharge. In most cases, they have one year to request such a change.
What Consequences Are There?
If you’re tempted to try to hide an asset, transfer money to a friend, or lie about your income, it’s important to know the consequences you could face.
If a creditor discovers what they believe to be fraud regarding the debt you owe them, they may file a lawsuit (known as an adversarial proceeding) with the bankruptcy court. If the judge finds in their favor, that debt may be deemed non-dischargeable, your case may be terminated, or you may be barred from filing for bankruptcy again for a specific period of time.
The situation could get much worse if the fraud is calculated to deprive creditors in general. This is because you risk violating criminal laws rather than just civil ones. Criminal fraud—including hiding assets, filing false forms, destroying records, or using false identity information to game the system—is referred to the FBI and Department of Justice. Those who help you could also face investigation.
How Can You Avoid Fraud?
The dangers of trying to defraud the bankruptcy process are greater than the rewards you may gain. So how can you ensure you never run afoul of fraud?
First, always consult with a qualified bankruptcy attorney in your state before making any large financial changes. This means seeking advice before buying or selling assets, before taking on new debt, before paying anyone preferentially, and before making a purchase that could be seen as unnecessary.
Next, gather your financial information as early as possible. Obtain and have handy details about assets, copies of tax returns, wage information, bank statements, and receipts for any cash or informal transactions. This helps you avoid accidentally leaving anything out of your forms and demonstrates transparency if there are specific concerns.
Finally, practice transparency. Avoid using cash, which cannot be tracked. Use debit cards instead of credit whenever possible. Maintain steady, necessary spending habits rather than making any big changes. Act as though the bankruptcy trustee is already looking at your financial transactions.
Where Should You Start?
Even if you’re still in the planning stages for a bankruptcy case, the best way to avoid even the accusation of fraud is to work with an experienced bankruptcy attorney. Siben & Siben LLP has assisted New York residents with all their bankruptcy needs since 1934. Call today to learn how we can help you.