In the United States, bankruptcy fraud is a federal crime. Bankruptcy is a legal process which allows a business or individual to be discharged of all their debts due to an inability to pay. There are multiple types of bankruptcy, but all have the same definition of what types of actions constitute bankruptcy.
There are three methods of committing bankruptcy fraud: concealment of assets, multiple filings and petition mills. The number of cases rises in proportion to the number of bankruptcy filings each year. Convictions for this crime can result in a fine up to $250,000 US Dollars (USD) and/or up to five years in prison.
Concealment of assets is the most common type of bankruptcy fraud. This type of fraud occurs when the debtor hides his assets during the declaration phase of the bankruptcy process, in an attempt to keep them from being liquidated. Debtors may fail to include them on the list of assets, transfer ownership to family or friends and move assets into off-shore accounts.
Multiple filing occurs when debtors file for bankruptcy in more than one state. They submit incomplete lists of their assets on both filings, in an attempt to avoid liquidation of those assets. This type of bankruptcy fraud also covers situations in which the debtor files for bankruptcy under a false or assumed name.
A petition mill is a particularly cruel type of bankruptcy fraud. Unlike concealment of assets or multiple filings, the fraud is not perpetrated by the debtor, but by a third party. This is common in poor neighborhoods and takes advantage of people facing eviction.
In a petition mill scheme, the debtor typically responds to an ad for firm who will help tenants avoid eviction from their rental accommodations. The firm takes all the debtor’s information and charges large fees, claiming they are fighting the eviction. In reality, they have filed for bankruptcy, ruined the debtor’s credit, and drained the cash resources.
Changes to the bankruptcy law have resulted in a significant increase in the number of bankruptcy fraud cases for concealment of assets. In the new law, a debtor cannot file for Chapter 7 bankruptcy if their disposable income is greater than $183.50 USD per month. He is forced to file for Chapter 13 bankruptcy.
Under Chapter 7, all debts are forgiven, while under Chapter 13, the debtor must make monthly payment toward a portion of her debt for three to five years. Once this period is complete, the debtor is discharged from bankruptcy. The bankruptcy stays on the credit file for 10 years from the date of discharge.
In order to avoid Chapter 13, debtors attempt to under report their income for the last six months. They increase their expenses to reduce the amount of disposable income reported. These steps both fall under concealment of assets and are considered bankruptcy fraud.