Bankruptcy Fraud • The Need for Accuracy and Completeness

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. It’s fraud if you charge over $750 within 90 days of filing which results in the court presuming you had no intention to repay. There is also a 70 day limit for cash withdrawals.

The penalty for making a debt so close to filing is you might have to pay back the amount charged. However, if you make such a charge in a Chapter 7 case, then, if you simply wait 90 or 70 days, the court does not presume that the debt is incurred by fraud. However, the court uses a 12-factor test to determine if it’s fraudulent. This determination includes the purpose of the debt and if you purposefully planned to incur the debt just before filing your 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. Other factors that contribute to Bankruptcy fraud include the following:

  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 the property. Unfortunately, Debtors often fail to understand that all assets must be included with no omissions.

Assets include a business you operate, pending inheritances, tax refunds, account receivables, or lawsuits. If you fail to list all of your property then, the court may refuse or deny you the ability to use your exemptions to keep it. Remember, you can’t claim what you don’t own or have. However, if your name is on a joint checking account then you must 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 fraud is obvious. In fact, when filing Bankruptcy, luxury purchases and cash advances are especially suspect. In fact, charges over $750 within 90 days raises objections. Usually, the punishment for charging on accounts just prior to filing is that the charges must be paid. However, creditors rarely file adversary objections over purchases for necessities such as tires or medications. Fortunately, charging for necessities is rarely considered fraudulent.

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. To further explain, when a garnishment, foreclosure, or repossession happens, you transfer an asset without getting back anything of value. In other words, transfers for less than the fair market value are preferential or fraudulent and are recoverable.

It is tempting to sell property to a friend or relative just prior to filing. But, 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. Also, 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 enable your attorney to plan with you so that you recover or keep your property. Although it is tempting to not report, under report, hide, or transfer assets to family members, DO NOT DO THIS.

The Bankruptcy Court reaches back up to two years to undo these transfers if the Debtor does not receive full value for the property. Plus, 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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