The 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 to make charges on an account within 70 days of filing in a Chapter 7. If a person charges over $750 on their charge card or other account within 70 days of filing, the court presumes that you knew and planned incurring the debt just before filing a Chapter 7 although you had no means or intention to repay. The penalty for making a debt so close to filing is that 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 so that 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.
Bankruptcy fraud also commonly arises in a case when a debtor fails to understand how to properly file for bankruptcy and:
- Understates or omits assets or income (your inheritance or lawsuit for personal injuries is an asset)
- Overstates expenses or debt
- 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 property. Debtors often fail to understand that a business they operate, pending inheritance, tax refund, account receivable or awards from a lawsuit are assets that must be reported and cannot be omitted. 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.
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.
The most common type of fraud in bankruptcy is charging large amounts just before filing. If a debtor purchases a $5,000 Rolex watch on his credit card the day before filing then the fraud is obvious. The Bankruptcy code says that luxury purchases and cash advances are especially suspected and charges over $750 within 90 days can be objected to. Creditors rarely file adversary objections over purchases for necessities such as tires or medications. Winning an objection for charging purchases for necessities seldom happens. The punishment for charging on accounts just prior to filing is that the item you charged must be paid for.
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.
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.
Keep 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.