Each year, bankruptcy provides a much needed life raft for millions of Americans struggling with debt, lifting them from under the tumultuous oppression of debt and into a financial future full of new opportunities. Bankruptcy can be a complex process, however, and well-intentioned filers sometimes find themselves in the midst of fraud allegations stemming from inadvertently providing false information or the like. Bankruptcy fraud is a white collar crime with a broad and far reaching definition. This form of fraud encompasses some acts which an individual could unwittingly engage in prior to or during the bankruptcy process. Even further, a finding that the filer intended to defraud creditors can lead to the bankruptcy court electing not to discharge a certain debt or dismiss the case entirely.
There are four distinct methods of committing the crime of bankruptcy fraud:
- Concealment of assets
- Intentionally filing incomplete or false forms
- Filing using false information or filing multiple times with real information
- Bribing a court-appointed trustee
Bankruptcy fraud is a serious matter, punishable by up to five years in prison and a fine of $250,000. Given the broad definition of the crime, it is possible for some filers lacking legal counsel or familiarity with the bankruptcy process to commit fraud. The following is a list of actions you should avoid taking if you are considering filing for bankruptcy:
- Transferring or giving away assets—one of the most common forms of bankruptcy fraud is the willful or fraudulent disposition of assets. Some filers innocently enough elect to transfer money, household goods, property, artwork, and the like, to another individual months or even years before declaring bankruptcy. The bankruptcy court will look back at all transfers occurring within the years leading up to your filing. Transfers committed with the intent to defraud or hinder the bankruptcy process are criminally chargeable. Further, the court may actually elect to undo the transfer and the items you attempted to transfer will end up going through liquidation. Consult with an attorney early on to ensure any transfer you make is legal and not subject to revision.
- Making big purchases—the bankruptcy court will look suspiciously at large, luxury purchases made in the months or even years preceding a bankruptcy. These purchases can indicate the intent to commit fraud. Further, sizable luxury purchases may lose their exempt status and be sold to satisfy creditors. The best way to ensure your legality is to avoid the use of credit cards as soon as you decide to file for bankruptcy. A licensed Arizona bankruptcy attorney can further advise you on potential purchases you may wish to make prior to filing.
- Paying back friends or relatives—it will raise a red flag to repay friends and family members prior to declaring bankruptcy. The bankruptcy court has the only authority to prioritize the repayment of creditors, and the court may feel you acted unfairly in reimbursing friends and family before preferred creditors. The bankruptcy trustee can actually sue individuals who received money from you prior to or during the bankruptcy process, in an effort to re-collect the funds. As such, it is best not to discharge old debts to family and friends before filing for Chapter 7 bankruptcy absent the express approval of legal counsel.