Bankruptcy Fraud the need for accuracy and completeness

A Bankruptcy Trustee examines for accuracy and completeness of the petition as well as assets. Inaccuracy in the petition may result in a 2004 audit. There are two common types of bankruptcy fraud that can arise in either a Chapter 7 or Chapter 13 Bankruptcy. The first type of bankruptcy fraud is making charges on an account within 70 days of filing a Chapter 7. If a person charges over $750 within 70 days of filing, the court presumes you had no intention to repay.

The penalty for making a debt so close to filing is you may have to pay back the amount charged. If you have made such a charge in a Chapter 7 case you may want to wait.  If you wait, the court does not presume that the debt was incurred by fraud. The court uses a 12 factor test to determine if it was fraudulent, which includes the purpose of the debt in  determining if you knew and planned incurring the debt just before filing a Chapter 7.

Common Bankruptcy Fraud scenarios

Bankruptcy fraud also commonly arises in a case when a debtor fails to understand how to properly file for bankruptcy and:

  1. Understates or omits assets or income  (your inheritance or lawsuit for personal injuries is an asset)
  2. Overstates expenses or debts
  3. Transfers property for less than what it is worth
  4. 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 property. Debtors often fail to understand assets must be reported and cannot be omitted. Assets include a business you operate, pending inheritances, tax refunds, account receivables or lawsuits.   If you fail to list property then the court may refuse or deny you the ability to use your exemptions to keep it. You can’t claim what you don’t own or have. If your name is on a joint checking account then you should claim that account even if the funds belong to the other party.

The most common type of fraud in bankruptcy is charging large amounts just before filing. If a debtor purchases a $5,000 Rolex watch  the day before filing the credit card fraud is obvious. The Bankruptcy code says luxury purchases and cash advances are especially suspected.  Charges over $750 within 90 days can be objected to. Creditors rarely file adversary objections over purchases for necessities such as tires or medications.  Charging for necessities are rarely fraud. The punishment for charging on accounts just prior to filing is that the item you charged must be paid for.

Preferential and Fraudulent Transfers as Bankruptcy Fraud

The second type of Chapter 7 or 13 bankruptcy fraud involves any transfer 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. Whenever a garnishment, foreclosure, or repossession happens, it is a transfer of an asset without giving back anything of value. Transfers for less than the fair market value are considered preferential or fraudulent and can be recovered.

Often a debtor is tempted to sell 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 there is no problem. However when the transfer is for less than fair market value the transfer becomes a fraudulent transfer and the trustee may recover the property and sell it. Since the debtor transferred the property he no longer owns it and again he can’t exempt it.

Reaching Back or disallowing a discharge

It is important to disclose any transfers and all your assets to the bankruptcy court and your attorney. If you tell your bankruptcy attorney about any transfer of assets and all of your assets, he will be able to plan with you so that you can recover or keep property. Some persons may be tempted to not report, under report, hide, or transfer assets to family members. DO NOT DO THIS. The Bankruptcy Court can reach back up to 2 years to undo these transfers if the Debtor was not paid full value for the property. Hiding assets is a federal crime.

Keeping incomplete financial records may also prevent you from getting a discharge, especially if you are filing a bankruptcy involving a business. The Bankruptcy Manual fully discusses bankruptcy fraud. Download your free copy here. 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.

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