A Bankruptcy Trustee examines for accuracy and completeness of the petition as well as assets. Unfortunately, inaccuracy in the petition might result in a 2004 audit. There are two common types of bankruptcy fraud that arises in either Chapter 7 or Chapter 13 Bankruptcy. The first type of bankruptcy fraud is making charges on an account within 90 days of filing a Chapter 7. Charges are presumed to be fraudulent if you charge over $750 within 90 days of filing. It looks like you made the charges with no intention to repay. But there are over 20 other factors the court looks at.
Creditors will rarely file adversary objections over purchases for necessities such as tires or medication. Charging for necessities is rarely considered fraudulent. If you replaced worn appliances or tires it probably was not fraudulent. If you purchased a Rolex watch it is far more likely it was fraudulent. There is a 70 day limit for cash withdrawals. But the only penalty is the amount you charged becomes non dischargeable.
Avoiding Bankruptcy Fraud • The Need for Accuracy and Completeness
The penalty for making a debt so close to filing is you might have to pay back the amount charged. If you made charges just before filing a Chapter 7 case, then, simply wait 70 or 90 days. The court does not presume that the debt is incurred by fraud unless it was charged just prior to filing the bankruptcy. The court uses a 21 to 23 factor test to determine if it’s fraudulent with each district looking a different factors. This determination includes the purpose of the debt and if you purposefully planned to incur the debt just before filing your Chapter 7 with no intent of repayment, it is fraudulent.
⎆ Common bankruptcy fraud scenarios.
Bankruptcy fraud also commonly arises in a case when a debtor fails to understand how to properly file for bankruptcy. Factors that contribute to Bankruptcy fraud include the following:
- Understates or omits assets or income (your inheritance or lawsuit for personal injuries is an asset)
- Overstates expenses or debts
- Transfers property for less than what it is worth
- Charges large amounts just prior to filing
Bankruptcy fraud is rarely criminal unless the debtor intentionally, and boldly lies, or prepares a petition to defraud. Normally the failure to list property will, at most, cause a debtor to lose the property. You can’t fail to list property and then use the exemption. Unfortunately, Debtors often fail to understand that all assets must be included with no omissions. Remember, you can’t claim the exemption if you don’t own or claim the property.
Assets include a business you operate, pending inheritances, tax refunds, account receivables, or lawsuits. If you fail to list any property then, the court will refuse or deny you the ability to use your exemptions to keep it. If your name is on a joint checking account then you must claim that account even if the funds like mom’s social security check belong to the other party.
⎆ Preferential and fraudulent transfers as bankruptcy fraud.
Chapter 7 or 13 bankruptcy fraud includes any transfer for less than fair market value or deception to the court about assets in a bankruptcy case. “Preferential or fraudulent transfers” include repossessions, garnishments, and foreclosures as well as gifts from the debtor to family members. To further explain, this is exactly what happens when a garnishment, foreclosure, or repossession happens, you transfer an asset without getting back anything equal in value. In other words, transfers for less than the fair market value are preferential, fraudulent and are recoverable. Gifts of under 600 dollars are not counted as a fraudulent transfer.
It may be tempting to sell the property to a friend or relative just prior to filing. If the sale is for the fair market value and the Debtor is paid the full value of the item, then, there is no problem. However, when the transfer is for less than fair market value, the transfer becomes a fraudulent transfer. Then, the Trustee may recover the property and sell it. After the Debtor transfers the property, the Debtor no longer owns the property and it is not exempt.
⎆ Reaching back or disallowing a discharge.
It is important to disclose any transfers and all your assets to the bankruptcy court and your attorney. Doing so enables your attorney to plan with you so you recover or keep property. AlHow to Keep Your Property When Filing Bankruptcy in Kentucky • Video(Opens in a new browser tab)though it is tempting to not report, under report, hide, or transfer assets to family members, DO NOT DO THIS.
The Trsutee can reach back up to two years to undo transfers if the Debtor does not receive full value for the property. Plus, hiding assets in bankruptcy is a federal crime.
Keeping incomplete financial records may prevent you from getting a discharge, especially if you are filing a bankruptcy involving a business. The Bankruptcy Manual fully discusses bankruptcy fraud. Tell your attorney about all of your assets, and about any transfer of property worth over $600 within the last several years. We can help you plan your bankruptcy so that you keep as much of your property as possible.
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.