Bankruptcy Fraud -
 


     A person filing a bankruptcy case obtains the protective shield of the federal government against creditor action. In exchange, the law requires that the debtor be truthful and forthcoming about his assets, liabilities, and financial condition. He cannot destroy books, documents or records relating to his finances. He needs to turn over requested documents and assets to the trustee. He cannot commit fraud in his bankruptcy case, including attempting to "pay off" or bribe bankruptcy officials or be in violation of state and federal laws restricting fraudulent transfers of assets. Debtors who commit bankruptcy fraud or make fraudulent transfers, face severe potential adverse consequences, both civil and criminal.

Debt Relief Laws

     Our bankruptcy debt relief laws are designed to help the poor but honest debtor in his time of need, and to return him to a productive life free of unpayable debt. The laws, however, are not meant as a haven for unscrupulous "scofflaws" operating in bad faith to cheat their legitimate creditors. The law is meant to provide a "fresh start", not a "head start".

 

Accurate Reporting of All Assets

     The debtor's schedules of assets and liabilities, statement of financial affairs, and other bankruptcy papers, are required to be filed under the penalty of perjury. The debtor must swear or affirm that the contents of the papers are true and correct. Section 521 of the Bankruptcy Code requires that the debtor and his attorney file these papers only after a diligent review as to their accuracy. The debtor's schedules are meant to be relied on by the courts, the U.S. Trustee, the panel trustee, and creditors. Due to the sheer volume of cases, each fact in each bankruptcy case simply cannot be independently checked and verified.

     In the normal Chapter 7 case, the petition and supporting schedules and statements usually are a minimum of 55 pages. Multiplied by 1.4 million, the number of bankruptcy cases filed in a normal year, this comes out to a minimum of 77 million pages of documents to be reviewed. The whole system therefore really depends on the truthfulness, completeness, and accuracy of the papers being filed by the debtor, backed up by the debtor's sworn oath as to their truthfulness.

Compliance with Transfer Laws

     For the bankruptcy system to function fairly and equitably, a debtor must obey bankruptcy law, as well as the law of his home state, concerning the transfer of assets prior to the bankruptcy filing. These transfers can be either to creditors or to third parties. The laws of the 50 states all have some form of "Fraudulent Transfer" law. These laws prohibit transfers by insolvent debtors which are made with the intent to hinder, delay or defraud creditors ("hard" fraudulent transfers") or which are made for less than reasonably equivalent value ("soft" fraudulent transfers"). The federal bankruptcy law, Section 544, gives the bankruptcy trustee the right to enforce these state laws to recover assets which were improperly transferred.

Principle of Equitable Distribution

     The bankruptcy laws operate under the principle of equitable distribution of available assets. This means that similarly-situated creditors are to be treated the same. The creditors are to be paid a pro rata share from the available asset pool. This includes payments from assets on hand in the bankruptcy case, and also those assets which are recovered from third parties under the trustee's "avoiding powers". It is not fair to pay one creditor in full, and not pay anything to another creditor.

Hiding Assets and Fraudulent Transfers

     It is not uncommon for a person contemplating a bankruptcy filing to not like the idea of having his nonexempt assets sold to pay creditors. He may dispute some of the bills he owes, or believe that he is a victim and should not be "punished" by loss Hiding Assets and Fraudulent Transfers - The law requires full disclosure of all assets as well as transfers to another personof his assets. He may want to pay some of his creditors, but not others. He may not mind paying his son's orthodontist bill, but does not want his ex-business partner to receive a nickel. He knows that if he files bankruptcy, the law requires full disclosure of all assets, limits what he is allowed to keep, i.e., claim as "exempt", and also requires that the creditors be treated equitably.

     A debtor may have assets over and above the exempt amounts. This asset may be a vintage 1950 Cadillac aging in the garage, a stamp, baseball card or coin collection, an antique watch, a valuable Cezanne Impressionist painting, or a diamond ring. The debtor may decide to simply not list the asset, especially if he does not think that any of his creditors know about it, and it has never been listed on a financial statement. Or, he may have an asset that he transfers to someone else, like a friend or relative, to "hold" for him, until he is done with the bankruptcy case. The person receiving the asset will often pay little or no money to the debtor. When the debtor files his bankruptcy case, he omits the asset from his Schedule of Assets, and also fails to list the transfer of the asset on the Statement of Financial Affairs. His hope is that it will not be discovered by the bankruptcy trustee. When the case is over, the friend or relative will give the property back to the debtor. The debtor will have successfully manipulated the system, kept all of his assets and paid none of his bills.

Written by Henry Rendler





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