How is Bankruptcy Fraud Legally Defined?
Bankruptcy fraud is a type of “white-collar crime,” or financial crime, which is defined by federal law under 18 U.S. Code § 157. Under the legal definition established by this statute, a person commits bankruptcy fraud when they file a bankruptcy petition, or another bankruptcy-related document, as part of a scheme to defraud another party, including having intent to devise such a scheme.
It is also bankruptcy fraud to make “a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title.” In other words, it is bankruptcy fraud to make false statements, or to supply false or misleading information, before or after filing, in connection with any bankruptcy proceedings, which is what is meant by “a proceeding under title 11.” (Not to be confused with Chapter 11 bankruptcy, Title 11 of the U.S. Code pertains to bankruptcy generally, including Chapter 7 bankruptcy, or “liquidation,” and Chapter 13 bankruptcy, or “reorganization.”)
Bankruptcy fraud can take several forms under these fairly broad definitions, such as filing multiple claims. One of the most common examples is the concealment of the debtor’s assets, which must be listed using accurate, complete, and up-to-date information when the debtor files for bankruptcy. For example, a document called Form 106A/B (Schedule A/B: Property) requires debtors to list any buildings, land, or other pieces of property they own or have an interest in.
Bankruptcy Fraud Penalties and Consequences
For a Sacramento bankruptcy attorney, committing or attempting to commit bankruptcy fraud can result in disbarment. But what if you aren’t an attorney? Other than potentially losing your job, what other types of consequences can arise from engaging in bankruptcy fraud?
In fact, this is really a two-part question: what are the consequences of bankruptcy fraud for your bankruptcy case, and additionally, what are the criminal consequences of bankruptcy fraud?
Let’s start by answering the first question. If you intentionally hide or attempt to hide assets, or if you are suspected by the trustee to have engaged in other forms of bankruptcy fraud, the bankruptcy court could potentially deny your discharge or even dismiss your case altogether, which means not only will you remain liable for your debts, you will also lose the invaluable protection afforded by the automatic stay, which normally freezes debt collection actions while a bankruptcy case is ongoing.
In addition to losing out on the substantial financial benefits of bankruptcy, you could have an even bigger worry: criminal prosecution. Though non-violent in nature, bankruptcy fraud is still considered to be a serious offense – and a conviction can result in serious criminal penalties to match. Not only does 18 U.S. Code § 157 permit convicted offenders to be heavily fined, further exacerbating any financial difficulties, it also establishes a prison sentence of up to five years, which may be imposed in place of or in addition to the fine.
Because these penalties are rooted in federal law, they apply not only in California but to filers throughout the United States.
Examples of Bankruptcy Fraud in California
From the penalties discussed above, it should be clear that bankruptcy fraud is a serious matter. Attorneys could lose their licenses and filers face hefty fines and incarceration. But what constitutes bankruptcy fraud? When someone files for bankruptcy, the amount of paperwork one must complete and the sheer volume of documents could feel overwhelming. Honest mistakes could occur that might resemble fraud. However, fraud is intentional conduct. Errors are a part of the bankruptcy process. For instance, a debtor might honestly forget certain assets when completing a questionnaire or not realize that a contribution from a family should have been disclosed. Mistakes are not fraud – if you bring them to the court’s attention and address the situation. This could be as easy as having our Huntington Beach bankruptcy attorney amend the incorrect information on your filings or forwarding the accurate documents to the trustee.
Below, we look at three of the most common forms of fraud in a consumer bankruptcy case. In many cases, a filer will be guilty of one of these three behaviors without the intention of committing fraud. Depending on the conduct, intention might not matter. Once you are aware of the problem, you must address it or face civil and criminal penalties.
Not Including All Your Assets or Undervaluing Them
When you file for bankruptcy, you are required to list every asset and account in which you have a legal interest. It does not matter how you acquired the property. If the bankruptcy court or trustee discovers you failed to include all of your assets, you could be accused of intending to commit fraud.
If you undervalue your property, you have effectively attempted to hide it from the court. While you are not required to provide an exact dollar amount for everything you own, you are expected to provide a good faith estimate. If you have a painting worth $25,000 but list it as $2,000, it could constitute bankruptcy fraud.
Some filers fail to list certain items because they are afraid the bankruptcy trustee will sell them. You should talk with our Orange County bankruptcy lawyers if this is the case. Many people are surprised at how generous the state exemptions are at allowing you to keep your property. However, even if you must lose some assets, it is better than facing the criminal and civil consequences.
If you have simply forgotten to list a piece of property, a personal item, or an old account, you should inform your attorney as soon as possible. It is completely legal to amend your bankruptcy schedules once they have been filed.
Fraudulent Transfers Some filers will try to protect their property by giving it to a friend or relative. By transferring legal ownership or title, they might believe it would not be included in the bankruptcy estate. Other people simply transfer property before they even had the notion of filing for bankruptcy. However, no matter the intent, the court would still consider the transfer of property fraudulent if any of the following occurred.
You sold the property for less than fair market value
The transfer or gift was made to a family member or close friend
You kept possession of the property despite the transfer or sale
The transfer was not disclosed on your bankruptcy paperwork
You filed for bankruptcy immediately following the transfer The trustee has the right to void these transfers, take possession of the property, and sell it to satisfy your creditors. It is also important to understand that a fraudulent transfer does not have to occur immediately before you file for bankruptcy. Under California law, any property transfer within four years of the filing date could be considered a fraudulent transfer. Therefore, it is critical to inform your Folsom bankruptcy attorneys of any transfers you made during the previous four years.