A Primer on Bankruptcy Crimes

Trustees, creditors, debtors and outside parties can all commit bankruptcy crimes. Getty Images

It's all about the money. Bankruptcy crimes almost universally involve an attempt by one party to either get more money or protect a limited pool of resources. These are federal crimes that arise out of a bankruptcy case or have some association with it. Virtually every player in a bankruptcy case can commit or be accused of a crime.

BANKRUPTCY IS DATA

Bankruptcy cases are conglomerates of what can be thousands of pieces of information.

Some of the information is strictly financial, like balances of debts. Others are related to the status of assets, or events in the debtor's financial life. The debtor's lawyer helps the debtor collect the raw data, analyze its significance, organize it into bankruptcy schedules and statements that are then filed with the court. The court, the trustee (who is appointed to administer the bankruptcy estate, which is the collection of the filer’s properties and rights), the creditors, and other interested parties, use this information to assess the debtor's financial condition at the time of filing, determine whether claims are proper and will be paid and whether the debtor's assets will be liquidated to cover the claims. 

Every party in a bankruptcy case is duty bound by statute to provide accurate and complete information. Every statement and schedule that a debtor files in court are signed under penalty of perjury.

These are called "unsworn declarations," but for bankruptcy purposes, they are the equivalent of swearing or affirming. The current iteration of the statement under penalty of perjury in the debtor's bankruptcy schedules is as follows:

You must file this form whenever you file bankruptcy schedules or amended schedules. Making a false statement, concealing property, or obtaining money or property by fraud in connection with a bankruptcy case can result in fines up to $250,000, or imprisonment for up to 20 years, or both. 18 U.S.C. §§ 152, 1341, 1519, and 3571.

Debtors are not the only players who file under penalty of perjury. Another example is the declaration on a proof of claim form filed by creditors, their attorneys or someone else on behalf of the creditor. That statement reads:

I understand that an authorized signature on this Proof of Claim serves as an acknowledgment that when calculating the amount of the claim, the creditor gave the debtor credit for any payments received toward the debt.

I have examined the information in this Proof of Claim and have a reasonable belief that the information is true and correct.

I declare under penalty of perjury that the foregoing is true and correct. 

In the margin next to the declaration that appears just above, the form sets out the current penalties for filing a false claim:

A person who files a fraudulent claim could be fined up to $500,000, imprisoned for up to 5 years, or both. 18 U.S.C. §§ 152, 157, and 3571. 

It should be evident that providing false information and filing a false claim are serious offenses.The duty to be truthful follows the debtor and creditors through every stage of the case, from documents filed with an unsworn declaration, to hearings on the record, and even proceedings like the official Meeting of Creditors, which is not held before the judge, but nevertheless requires testimony given under oath.

 

Perjury is but one type of crime in a bankruptcy case. Here are others that we often see.  

KNOWING AND FRAUDULENT CONCEALMENT OF ASSETS

Although not an exhaustive list of crimes related to bankruptcy cases, Section 152 of Title 18, the federal criminal code, sets out a number of crimes directly flowing from a bankruptcy case. The Feds find and prosecute the fraudulent concealment of assets more commonly than any other bankruptcy crime. By some account, 70% of the bankruptcy crimes prosecuted each year involve concealment of assets.

Some examples of knowing and fraudulent concealment include:

  • Failing to disclose equipment for a business.
  • Transferring a piece of real estate into another person's or company's name, then failing to disclose the asset on the bankruptcy schedules or under oath.
  • Money or asset laundering using related entities or companies that do not file a bankruptcy case. 
  • Transferring assets between husband and wife before one of the two files bankruptcy.
  • Dumping money into offshore accounts without declaring the transfers to the court.

OTHER BANKRUPTCY CRIMES

Section 152 and Section 157 of Title 18 set forth a number of other actions that can constitute a bankruptcy crime, including ones listed above. 

  • Making a false oath or account
    • Example: Lying under oath
  • Making a false declaration under penalty of perjury
    • Ex: Lying on official documents like bankruptcy schedules that are not signed under oath.
  • Presenting a false claim
    • Ex: Filing a claim for more than the amount actually owed
  • Receiving property with the intent to defraud creditors or the court
    • Ex: Hiding assets for a debtor
  • Bribery
    • Ex: Bribing a trustee to get him to overlook assets
  • Transferring or concealing property
    • Ex: Moving money offshore or putting a house in someone else’s name
  • Destroying or tampering with documents and records
    • Ex: Changing accounting figures to hide assets
  • Presenting false financial statements to obtain goods or services
    • Ex: lying on a loan application
  • Charging goods or services without intent to pay the debt
    • Ex: charging up credit cards in anticipation of filing a bankruptcy case
  • Ponzi schemes
    • Ex: Using assets of one investor to pay off another investor

INNOCENT ERRORS VS. INTENTIONAL ACTION

So, what if you fail to list the snowblower your neighbor borrowed last winter that's sitting in his tool shed/ Have you committed a crime? Not necessarily. Prosecutable bankruptcy crimes must involve the element of intent. But intent can be tricky to prove, and the US Attorney's office, who usually prosecutes these crimes, must often use indicia of intent, like proving actions that could not have been undertaken for legitimate purposes.

WHO CAN BE IMPLICATED

As we said above, debtors are not the only people who can get caught up in or commit a crime. Anyone involved in a bankruptcy case can be held accountable for infractions. Trustees have been caught embezzling funds from the bankruptcy estate, friends and relatives can conspire to conceal the property, and creditors can knowingly file claims for incorrect amounts or harass debtors for payment. 

In recent years, clever criminals have invented new ways to game the bankruptcy system. With the upsurge in foreclosures over the last decade, we saw a tremendous increase in people purporting to help beleaguered homeowners save their homes by negotiating modifications and forbearances. When their efforts failed, these agents would often use the bankruptcy laws to their advantage and the homeowner's disadvantage. The filing of a bankruptcy case acts as an injunction that prohibits further contact with the debtor without permission of the bankruptcy court. Also called the automatic stay, this injunction can stop many collection actions including repossessions and foreclosures. The agents for the homeowners would prepare and file cases taking advantage of the injunction to stop an impending foreclosure. Once the danger had passed, they would allow the case to be dismissed. Sometimes the homeowner never knew what the agent had done until it showed up on a credit report. 

Filing bankruptcy is also a common ploy among identify thieves. They will use stolen names and social security numbers to charge up a lot of debt, and then file a bankruptcy case using the stolen name and false social security number.

The types of activities that will bring a charge of bankruptcy fraud can also violate other federal and state criminal statutes, including RICO, conspiracy, money laundering, tax fraud, mail fraud, wire fraud, credit card fraud, and use of a false social security number, all which carry their own serious penalties independent of bankruptcy. 

THE INVESTIGATION

Trustees and creditors are the most likely players to suspicious activity. The trustee is in charge of determining whether there are any assets that can be liquidated and paid to creditors. The trustee will also review all of the creditor claims filed in the case to determine which claims are proper and properly backed up by evidence of the debt and balance. A trustee who suspects that a crime has been committed will normally refer the matter to the office of the US Trustee, a division of the Justice Department. The FBI might also become involved. 

Creditors often uncover evidence of a bankruptcy crime when they gather evidence for a challenge to the discharge or to the dischargeability of their debt.

PENALTIES FOR BANKRUPTCY CRIMES

The penalties for a bankruptcy debtor convicted of a bankruptcy crime can range from the dismissal of a case to serious federal prison time. Here are some of the penalties a defendant can expect. The case is dismissed - thrown out of court.

  • The case is dismissed and the debtor is enjoined (prohibited) from filing another case for a period of usually as little as three months to as much as a lifetime ban on the filing. 
  • The case remains in court, but a particular debt is declared non-dischargeable.
  • The debtor loses the right to a general discharge, but assets are still liquidated to pay debts.
  • The perpetrator is fined up to $250,000 per infraction.
  • The perpetrator is fined and/or given probation in lieu of a prison sentence.
  • The perpetrator is fined and/or sentenced to a term in federal prison for up to five years.

HIRE A CRIMINAL DEFENSE ATTORNEY EXPERIENCED WITH BANKRUPTCY PROSECUTION

This is not the time to go it alone. As a debtor in a bankruptcy case, you are probably already represented by an attorney. If you are under investigation for bankruptcy fraud, you might need to hire a criminal lawyer as well. If you are a creditor, likewise. The prosecution can be complicated because of the nature of the crimes committed. Some would say you should hire a defense attorney as soon as you see a subpoena or when you get that first call from the trustee, the US Attorney, the US Trustee or the FBI.