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Understanding Bankruptcy Fraud and Its Consequences

While the bankruptcy law is intended to give people a fresh start by wiping out their debts, at the same time it contains protections against abuse of the system. Debtors filing for bankruptcy are required to completely and accurately disclose their assets, income, debts and other finances. The law includes sanctions for a debtor who commits fraud or who otherwise acts in bad faith.

Fraud can be fatal to a bankruptcy proceeding. A debtor who hides assets or misstates income or debt faces the risk of having his or her case dismissed without a discharge. Alternatively, the court may lift the automatic stay that attaches when a bankruptcy petition is filed. The creditor then would be free to pursue the debtor outside the bankruptcy proceeding.

Under the Bankruptcy Code, fraud can occur even before the filing of a petition. A common situation is where a debtor applies for credit, misstates his or her income or assets and receive a loan based on those misstatements. Another instance of fraud is forging documents in connection with a credit application. If a debtor buys goods or services on credit with no good faith intention of repaying, that can also amount to fraud.

Other instances of fraud that can take place before the filing of a bankruptcy petition include:

  • transferring property to a friend or family member within five years of filing
  • selling property below fair market value in an arm’s length transaction within a year of filing
  • putting a phony lien on real property

Fraud also might be committed during the bankruptcy proceeding, such as misstating income or debt, not disclosing all assets, destroying records or otherwise making false statements. Debtors sometimes take such actions in order to pass the means test, which determines whether their income is low enough to qualify for Chapter 7 bankruptcy.

If the bankruptcy trustee. the United States Trustee, or a creditor suspects fraud on the debtor’s part, they can seek to have certain transactions voided. That results in the relevant property becoming part of the bankruptcy estate, where it is subject to liquidation to pay off creditors. The bankruptcy court can deny discharge of debts incurred on false pretenses or can dismiss the case outright.

In the worst-case scenario, significant incidents of fraud could lead to a referral to the U.S. Department of Justice for criminal fraud charges, which are punishable by up to five years in prison and up to $250,000 in fines.

When you are in financial straits, you need a bankruptcy attorney who knows the law and the court system and who can pay special attention to your needs and objectives. Don’t use self-help when you do not know what you are doing! Based in downtown Beverly Hills, I provide a wide range of services for individuals and families suffering from the weight of excessive debt. Call the Law Offices of Michael Jay Berger at [in::phone] or contact me online to schedule a free consultation.

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