Cornell Law School explains how individuals who file for bankruptcy may take actions or make mistakes that lead to federal prosecution for bankruptcy fraud.
People convicted of bankruptcy fraud may face a prison sentence of up to five years. A court may also assess a fine of up to $250,000. Even the intention to commit fraud may result in bankruptcy fraud charges.
Individuals risk fraud charges when they conceal assets
In bankruptcy, debtors must provide a complete and accurate list of their assets. This list allows creditors to identify resources available to pay the debtor’s obligations. If the asset inventory is incomplete, creditors may not have an adequate opportunity to recover moneys owed to them. Approximately 70% of bankruptcy fraud occurs when a debtor hides assets to keep them out of the bankruptcy estate.
Debtors must submit true and complete documents
A debtor who provides false or incomplete information on any bankruptcy form may face both bankruptcy fraud and perjury charges.
The Journal of Accountancy explains that misleading bankruptcy forms or financial records may uncover fraud. For example, a debtor may face criminal charges for significantly undervaluing assets or underreporting income on schedules submitted to the bankruptcy court. Financial statements that are not consistent with the debtor’s recently filed tax returns may reveal tax fraud.
Individuals must use caution when they transfer assets
An individual’s transfer of property or money to friends or relatives may alert the court to possible fraud. For example, if an individual sells a valuable property to a family member for less than market value, a bankruptcy court may consider the transfer fraudulent. The same may be true for certain transfers made prior to the bankruptcy filing.
Debtors who make misrepresentations in bankruptcy put themselves at risk of fraud charges. The judge, bankruptcy trustee and lawyers scrutinize all filed documents.