Where there is money, fraud often follows—it’s just an unfortunate fact of life. And bankruptcy cases are no different. When involved in a bankruptcy matter, you’ll want to:

• avoid even the appearance of dishonesty
• watch for signs of fraud by others, and
• report any suspicions of bankruptcy fraud you might have.

The line between innocent mistakes and intentional deception can be surprisingly thin, at least in the eyes of the bankruptcy court. In this article, you’ll learn how to recognize, avoid, and report bankruptcy fraud.

What Is Bankruptcy Fraud?

Bankruptcy fraud is a federal crime, and judges and prosecutors take it seriously. To prove bankruptcy fraud, the government must show that:

• the defendant (usually the bankruptcy filer) intentionally misrepresented (knowingly lied about) an important fact in the case
• with the intent to deceive someone else involved.

For the most part, bankruptcy fraud usually involves a filer’s act or failure to act during the bankruptcy case. Of course, most people won’t admit that they meant to commit fraud, so fraud is typically proven by actions, such as:

• moving money in a suspicious way
• filing documents containing contradictory information with the court
• failing to disclose a lottery prize, or
• allowing your creditors to rely on knowingly false facts, such as outdated financial information.

Sometimes bankruptcy fraud is part of a scheme, however. For instance, a “bust-out” business bankruptcy scheme involves acquiring a business, selling off the assets, and stiffing creditors, before filing for bankruptcy without disclosing the previously sold assets.

Types of Bankruptcy Fraud

Bankruptcy fraud comes in four basic forms:

• concealing property
• giving false information
• filing multiple bankruptcy cases, and
• trustee-related fraud.

Concealing Property

Concealment is by far the most common type of bankruptcy fraud. It typically happens when a bankruptcy filer hides valuable assets and fails to list the hidden property in the bankruptcy schedules (the official forms you file to start your bankruptcy).

Examples of fraudulent concealment would include:

• hiding expensive jewelry or artwork with friends or family
• placing cash or property in an undisclosed safe deposit box, or
• keeping assets at home without telling anybody that they exist.

(Find out what property you’re allowed to keep in How to Find Your State Bankruptcy Exemptions.)

Providing False Information

Everyone who files a bankruptcy case must list income, assets, and liabilities in the proper schedule—and the information must be complete and accurate. Giving misleading or incomplete information about yourself, your property, or your debts is a type of fraud involving false information.

Filing a bankruptcy under a false name or social security number to conceal misconduct would constitute fraud.

Filing Multiple Bankruptcy Cases

Multiple bankruptcy filings can be fraudulent if you file them with the goal of deceiving creditors about your identity or assets. All consecutive filings aren’t fraudulent, however—sometimes there can be good reasons to file more than one case.

But when someone files cases in multiple states to confuse the court and creditors, or repeatedly files and dismisses bankruptcy cases to avoid a home foreclosure, that person could be found to have committed fraud.

Fraudulent Acts by Bankruptcy Trustees

Bankruptcy filers aren’t the only participants that can commit fraud. Bankruptcy trustees, usually private attorneys or accountants appointed in Chapter 7 cases, sometimes abuse their positions by taking money from a sale of property for personal use or accepting a bribe from a bankruptcy filer to look the other way when that person hides an asset.

How to Avoid Bankruptcy Fraud

Disclose, disclose, disclose. The bankruptcy process depends on full and accurate disclosure by all participants to run properly. You shouldn’t have a problem if you list all the:

• assets you own
• debts you owe, and
• recent transactions you’ve engaged in.

Here are a few tips:

• You’re in charge of what you report to the court—don’t forget that accuracy matters.
• Carefully review all of the information on your bankruptcy petition before you sign it.
• Remember that attorneys can make mistakes—check their work.
• Circumvent potential problems by explaining anything that you think the trustee or court might question or misunderstand.

Of course, people can make honest mistakes. If that happens to you, promptly admit any error; apologize to the court, the trustee and any other affected persons; and, make the necessary correction.

How to Report Bankruptcy Fraud

If you suspect that someone involved in a bankruptcy case has committed fraud, you’ll want to report it immediately to the U.S. Trustee—especially if there’s a chance someone might accuse you of participating in it.

The U.S. Trustee is responsible for finding bankruptcy fraud. You can visit the U.S. Trustee’s website, contact a local office, or mail your concern to:

U.S. Department of Justice

950 Pennsylvania Avenue, NW

Washington, DC 20530-0001

The U.S. Trustee will get the information into the hands of the right enforcement agency, whether that be the U.S. Attorney, the Securities and Exchange Commission, or the Internal Revenue Service.

Bankruptcy Fraud Consequences

Government watchdog agencies don’t have the budgets to review every case, so to deter fraud, the penalties are severe. Bankruptcy fraud is a felony that can result in fines up to $250,000 and imprisonment for up to twenty years.