Bankruptcy is the state of owing debts greater than one has assets and being unlikely to be able to pay the debt. Early American bankruptcy law was established primarily by the states, causing there to be a wide discrepancy between how bankruptcy was handled in different states. And because each state governed its own bankruptcy laws, they generally favored the debtors who were farmers whose ability to pay debts depended on weather conditions.
Federal bankruptcy laws were enacted to replace the conflicting state laws with a universally applicable national procedure protecting both debtors’ rights and creditors’ rights.
Today, bankruptcy laws protect individuals and businesses facing overwhelming debts they are unable to pay and allow them time to engage in an orderly process so they may reorganize or obtain full relief by discharging the debt entirely.
Bankruptcy fraud is the misuse and abuse of the protections afforded by the bankruptcy system. To encourage honesty and transparency in bankruptcy proceedings, U.S. Criminal Code 18 U.S. C. § 157 penalizes anyone who is convicted of intentionally misrepresenting the true state of their finances in bankruptcy court.
Stechschulte Nell, Attorneys at Law, have many years of experience representing people and businesses charged with bankruptcy fraud. As you will read in this blog post, there are several ways in which to commit bankruptcy fraud. Your bankruptcy fraud defense lawyer needs to know the law’s intricacies and the most effective defense to employ in each case.
What Is Bankruptcy Fraud Under Federal Law?
Federal law prohibits any person from knowingly making a false or fraudulent representation, claim, or promise concerning or in relation to a filing in the bankruptcy court proceeding. The essence of the offense is an intentional attempt to obtain bankruptcy protection from creditors without forthrightly disclosing the existence or value of an asset, failing to disclose an interest in assets, or exaggerating the extent to which a person is indebted.
Misleading the U.S. Trustee or the court in bankruptcy procedures is a federal felony.
Explaining Federal Bankruptcy Fraud
A person filing a bankruptcy petition can become subject to prosecution for bankruptcy fraud if they “knowingly and intentionally” commit any of the following acts or omissions:
- failing to disclose a financial asset to avoid forfeiting it,
- filing false, misleading, or incomplete forms,
- conspiring with others to falsify documents or mislead the court, creditors, or trustee,
- bribing or attempting to bride the court-appointed trustee,
- committing any of these offenses with another crime like identity theft, mortgage fraud, money laundering, or public corruption.
In the U.S., over 70 % of bankruptcy fraud crimes involve hiding or attempting to hide assets. Often this is accomplished by transferring assets into a relative’s or a friend’s name. Concealing assets permits the debtor to keep the asset that might otherwise be sold or used to satisfy a creditor’s claim in bankruptcy proceedings. By hiding an asset, the creditor’s claim against the debtor is extinguished, and the debtor maintains ownership of the asset.
Common Examples of Bankruptcy Fraud
Hiding Assets
In bankruptcy proceedings, a debtor’s assets are valued to determine whether they may be used to satisfy the outstanding claims of money owed to creditors partially. Once a debtor’s assets are fully valued and creditors’ claims are satisfied to the extent possible given the debtor’s available assets, the debts are discharged forever.
The debtor may carry damage to their credit rating for a time, but the debts are no longer owed. But hiding assets enables the debtor to have their cake and eat it too. The dishonest bankruptcy petitioner conceals the asset from the court and creditors, discharges the debts, and keeps the property that would have helped to pay the just debt.
Hiding the Value of Your Assets
Rather than hiding an asset entirely, people seeking bankruptcy court protection often understate the value of an asset to prevent it from being recognized as a potential resource to pay a creditor’s claim. This can occur when a person’s asset is actually valued higher than an applicable exemption.
For example, suppose bankruptcy rules exempt the debtor’s home from availability to creditors up to $300,000, and the house is actually valued at $500,000. By claiming the home is only worth $300,000, the debtor retains an additional $200,000 in an asset that otherwise might have secured a creditor’s claim.
Misrepresentations and False Statements
Bankruptcy fraud by misrepresentation and false statements is among the most charged offenses. Every bankruptcy petition includes a sworn statement of the debtor’s property, expenses, business interests, income, investments, and all of their debts. By falsely inflating their stated expenses, less income is available to pay debts. Any fudging of such information regarding a “material fact” in bankruptcy proceedings could be a violation of federal bankruptcy law.
Creditor Bankruptcy Fraud
Debtors are not the only party that may be prosecuted for bankruptcy fraud. Creditors who misstate or inflate a petitioner’s debt to obtain a higher partial payment from the bankruptcy court are also subject to prosecution for bankruptcy fraud.
Also subject to prosecution for bankruptcy fraud are creditors who act with the intent to defeat the purpose of the bankruptcy process by seeking or obtaining additional payments from debtors after the bankruptcy relief has been granted.
Penalties for Bankruptcy Fraud
Bankruptcy fraud is punishable by up to 5 years in federal prison and a fine of up to $250,000. The actual penalty imposed by the court will depend upon the nature and extent of the defendant’s criminal conduct, their past criminal history or lack of one, their personal life and employment, the federal sentencing guidelines, and the judge’s discretion.
Defenses to Federal Bankruptcy Charges
The most difficult element of criminal bankruptcy fraud for a prosecutor to prove beyond a reasonable doubt is the defendant’s “intent to defraud.”
In the formal legal language of the statute, the government must prove that the defendant “devised or intended to devise a scheme or artifice to defraud.”
Defending bankruptcy fraud charges requires the skill and knowledge of a long-experienced federal criminal defense lawyer. The key to defeating these charges can be challenging the evidence of intent by showing the defendant’s misstatements were just that, errors, unintended and without design to defraud.
Bankruptcy often involves people who have neglected their finances or who have found they were overwhelmed by complex financial arrangements. It is easy to believe that such a person was disorganized, neglectful, or forgetful about the specific details of where every asset was and what it was worth. Unintentional mistakes, misstatements, or failures to identify an asset are not criminal conduct.
Another defense might involve the expiration of the statute of limitations. A prosecution must begin within five years from the date of the offense.
Read More > What Makes a Crime a Federal Offense?
Federal Fraud Defense
Only qualified federal criminal defense lawyers can provide the advanced expertise you need if you are under investigation or charged with bankruptcy fraud. In Tampa and St. Petersburg, Florida, The Stechschulte Nell Law Firm is ready to help you.
Call us today for a federal fraud case review at 813-280-1244. We’re ready to defend you.
