Avoiding Conduct That Could Amount to Bankruptcy Fraud

Fraud occurs when a person makes a material misstatement of fact with the intent of deceiving someone else for personal gain. Fraud committed by a debtor can derail a bankruptcy case and have other disastrous consequences. There are two general types of bankruptcy fraud: pre-filing fraud and fraud committed while the bankruptcy case is in progress.

Pre-filing bankruptcy fraud usually involves the misuse of credit. Some borrowers misrepresent their creditworthiness to lenders in order to obtain credit, intentionally overstating income or the value of assets. In other instances, borrowers abuse existing credit lines. They purchase goods or services on credit knowing there is no possibility they can repay the debt or with no intention of repaying.

Fraud committed during bankruptcy often involves concealing assets. In a Chapter 7 bankruptcy, creditors can recover some of their outstanding debt through the sale of the debtor’s assets. Also, the bankruptcy laws allow debtors to retain some property despite having outstanding debts. Debtors commit fraud if they illegally misrepresent the existence of their assets, such as by transferring their assets to friends or relatives to hold temporarily so as to keep the property away from creditors. Debtors might also hide assets in accounts that are never disclosed to the court. When creditors discover hidden or undervalued assets, it can trigger a fraud allegation and adversarial proceedings in bankruptcy court.

The penalties for bankruptcy fraud are potentially severe. The court can sanction the debtor by dismissing the entire case or by denying discharge of one or more debts. The court can also impose fines on the debtor and/or award the creditor its legal fees for challenging fraudulent activity. Fraud can also result in a criminal prosecution, which can land the debtor in prison and/or expose the debtor to monetary penalties. The bankruptcy court can also refer the case to state authorities for prosecution.

Bankruptcy fraud requires specific intent. That is, the debtor must have made the misstatement of fact for the express purpose of deceiving the court or a creditor. An honest mistake in a credit application or bankruptcy filing is not fraud. However, whether a false statement was intentional or accidental is a question of fact. Debtors should carefully document all necessary information when applying for credit or for filing bankruptcy in order to avoid costly consequences.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced bankruptcy law firms. If you or your company are in financial distress, feel free to contact us online or call 310-271-6223 to schedule a consultation.