Bankruptcy fraud is a grievous crime. In cases where a fraud is proven are, at least, dropped by the bankruptcy court.
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Amy Nickson On 4th Apr,16
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Bankruptcy fraud: A federal crime that can put you behind bars

Bankruptcy fraud is a grievous crime. In cases where a fraud is proven are, at least, dropped by the bankruptcy court. The accused will very likely be slapped with steep fines and also face harsh penalties.

Since bankruptcy fraud is considered a federal crime, the severity of the punishment may increase quite fast and in certain cases, are charged with criminal prosecution as well. The utmost penalties stipulated in cases of bankruptcy fraud are a fine of $250,000 and/or five years behind the bars, i.e., in federal prison.

Bankruptcy fraud law and the consequences

According to Section 523(a)(2)(A) mentioned in the Bankruptcy Code, a person convicted of committing bankruptcy fraud will be excluded from getting discharged of any debt (or financial obligations) with the intention of making money, owning a property, receiving a service/s, or of getting an extension, renewal, or having a credit refinanced to the extent by means of false representation, false pretenses, or actual fraud.

This implies a bankruptcy petitioner who resorts to unfair means will have his or her application rejected and thrown out of court. A lot of times, bankruptcy court might just decline to discharge a filer’s debts, depending upon the severity of the crime and the size of his or her outstanding loan balances. Without a discharge, such a filer will remain liable for the repayments of all his or her debts whatsoever.

Apart from that, assets of the accused might be liquidated to meet the creditors’ demand, as per the discretion enjoyed by the bankruptcy court. However, a settlement can also be reached, wherein the plaintiff accepts reduced debt payment, only in exchange of half the tenure awarded to the convict associated with the bankruptcy fraud.

Therefore, concealing assets, filing false claims, making false statements under penalty of perjury (either in writing or verbally), destroying financial records relevant to the respective bankruptcy case, giving or taking bribes and the likes is considered as bankruptcy fraud - a federal crime.

Alternatively, bankruptcy fraud can also be termed as a civil wrong. However, it differs on the basis of the intent a bankruptcy filer had while committing the same. In other words, criminal fraud is that in which the crime was committed with full knowledge of the consequences and also to deceive the court as well as the creditors. But fraud that is less deceptive and misleading is regarded as a civil crime.

Types of bankruptcy frauds

Here are some of the most common types of bankruptcy fraud that you must avoid at all costs:

Bribery

It would be deemed as a bankruptcy fraud, if you bribe your creditor/s or attempt to do so during the course of your case’s hearing. Usually, creditors are barred from making any claims for payments against you, once you’ve filed in your bankruptcy papers.

However, if you, say for instance, attempt to convince your creditor/s, asking them to opt out of filing in their claims and that they heed to your request, then such an act of bribery will amount to bankruptcy fraud.

Cover-up assets

This is perhaps the most rampant acts of bankruptcy fraud of them all. This kind of fraud calls for criminal prosecution against the perpetrators. Here, if you try to hide or cover-up your assets like vacation properties, jewelries, investments, etc or if you try to hinder the smooth functioning of the bankruptcy process so as to prevent the court from finding out the exact amount of assets owned by you, then that too will be regarded as a form of bankruptcy fraud. Once your bankruptcy protection application has been accepted by the court, it'll draw up a list of all the assets you've mentioned in your application (known as inventory) and put them under its own control called as bankruptcy estate.

Its an important part of the bankruptcy discharge process as the court officials have to determine the amount you can afford to pay back to your creditors. Hence, a lot of bankruptcy petitioners like you get mislead and try to dupe the court of their actual assets, thereby preventing the latter from using whatever they have to in order to pay off their dues.

Deliberate acts

Committing bankruptcy fraud though at large is a criminal offence, but a deliberate one too. This is because you cannot do such crimes out of sheer ignorance and this calls for appropriate prosecution as well. For example, if you forget to mention in your bankruptcy application about the sports car your father gave you, but you never got to possess it, then such an act won’t be considered as a bankruptcy fraud.

However, if you purposely hide your assets or resort to misleading acts knowing well that they are fraudulent, then those acts would fall under the bankruptcy fraud category. For that reason, hiding assets deliberately is a crime but forgetting to mention about a certain gift isn't.

Penalties for bankruptcy frauds

You can be tried and sentenced with either criminal or civil penalties, depending upon the seriousness of your offence. Here is an overview of both for you to understand the consequences better and run your course of debt discharge accordingly:

Criminal penalties

Probation -

In case of you getting convicted of bankruptcy fraud, then the court may pronounce a sentence of probation against you. Here, you would be required to honor the court's order for a stipulated period of time, to say, meet a probation officer and pledging to stay away from all sorts of crimes. Generally, probation's have a tenure of one to three years, though they could be longer. But that depends upon the bankruptcy court.

Imprisonment -

Having been convicted of a bankruptcy fraud may land you in federal prison for a maximum period of 5 years. A bankruptcy court can award not more than 5 years of imprisonment for such an offence. But if you are accused of multiple acts of bankruptcy fraud, then the court might award you with 5 years of imprisonment for every crime committed separately.

Civil penalties

Loss of exemptions -

Yes, it is necessary to quote every asset you own in the bankruptcy application. But this doesn't imply in anyway that all of them would be liquidated or sold off to meet your creditors’ obligations. Rather, as per the Bankruptcy Code, you would be eligible to retain a part of your assets regardless of the amount of debt owed by you.

Unfortunately, you would lose whatever you could’ve retained as part of the property exemption laws, if the court finds you guilty of committing bankruptcy fraud.

Forfeiture of discharge benefits -

As you must be aware of bankruptcy’s benefit that it provides you with a fresh opportunity to organize your finances post a complete discharge from all your debts. It also helps you to silence all the menacing collection calls as well as preventing the debt collectors from resorting to harsher collection tactics in an attempt to make you pay up.

However, if you commit bankruptcy fraud and are proven guilty of the same, then you’ll no longer have the liberty to enjoy a full debt discharge. Failing to accomplish that, your creditors can file lawsuits against you, have your wages garnished, foreclose on your property or even take other legal actions against you.

So, to avoid bankruptcy fraud, along with the cost of non-fraudulent blunders, it is crucial to do all the paperwork's correct right from the very beginning. If you want to ensure a smooth bankruptcy discharge, then you can ill-afford to commit the above discussed errors while filling in your bankruptcy papers. Here, working with a bankruptcy attorney or an expert would be a great idea, nevertheless.

See also: Bankruptcy Fraud: How attorneys can turn the table for good

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