together federal investigators from the FBI, IRS, US Trustee’s Office and many other federal agencies to investigate and help prosecute individuals suspected of committing bankruptcy fraud. Bankruptcy judges have joined in the hunt for bankruptcy fraudsters in an effort to clean up a system that is suspected of being rife with corruption, increasing the number of direct referrals for federal prosecution. While many targets of these investigations argue mistake or sloppy filings, allegations of bankruptcy fraud are serious matters.
Bankruptcy fraud is a Federal crime. The crime occurs when a defendant undertakes a fraud scheme against anyone and then carries out or conceals the scheme by filing for bankruptcy or by filing any documents in the bankruptcy. Section 157 of Title 18, United States Code, punishes a defendant found guilty under this section with imprisonment of not more than five years. Section 157 is patterned after the Federal mail and wire fraud statutes and was created by the Bankruptcy Reform Act of 1994.
There are many types of bankruptcy but each is committed in one or more of three ways: concealment of assets, multiple filings, and petition mills. The latter are third parties, mostly found in depressed neighborhoods, who file bankruptcy petitions for poor people facing eviction. They charge large fees with promises of keeping people from being evicted from their home or rental accommodation. At the end of the day, the debtor’s credit is ruined and his/her precious cash reserves are gone.
But it is the concealment of assets that is the most common type of bankruptcy fraud. This fraud generally occurs in the initial declaration phase of the bankruptcy process when the debtor hides his/her assets to keep them from being liquidated. This can occur when the debtor places assets in off shore accounts, gives the assets to family or friends, or simply does not declare them on the list of assets.
Multiple filings occur when someone files for bankruptcy in more than one state. Each petition will generally contain an incomplete list of assets in an effort to avoid liquidation. This fraud scheme can also occur when the petitioner uses a false or assumed name.
There are two basic types of bankruptcy: What is known as Chapter 7 and Chapter 13 bankruptcies. If someone has less than $183.50 in disposable income per month, a Chapter 7 filing will forgive all his/her debts. But if a person’s monthly income is greater than $183.50, they must file under Chapter 13 which is not so forgiving. Chapter 13 requires the debtor to make monthly payments toward his/her debt for three to five years. To avoid the strictures of Chapter 13, debtors seeking bankruptcy protection will often under report their disposable income during the six months prior to filing by increasing their expenditures.
A “fraudulent conveyance” occurs in bankruptcy when a debtor transfers his/her assets to a third party to keep creditors from getting to them. There are two types of fraudulent conveyances under bankruptcy law: actual fraud and constructive fraud. The former involves a specific intent to defraud creditors while the latter involves a transfer in which the debtor received less than “reasonably equivalent value.”
But there is a fourth, lesser prosecuted type of fraud: either attempting to or actually bribing a court-appointed trustee. The IRS considers this the worst type of fraud because it involves a fraud upon the court through an individual trusted by the court. Yet, while this type of fraud is lesser known to the general public, the corruption associated with it is quite prevalent in bankruptcy proceedings—at least that is what former U.S. Attorney General John Ashcroft told the Hague Global Forum on Corruption in 2007. In a letter, Ashcroft told the Hague:
“Bankruptcy court corruption is not just a matter of bankruptcy trustees in collusion with corrupt bankruptcy judges. The corruption is supported, and justice hindered by high ranking officials in the United States Trustee Program.
The corruption has advanced to punishing any and all who mention the criminal acts of trustees and organized crime operating through the United States Bankruptcy Courts. As though greed is not enough, the trustees, in collusion with others, intentionally go forth to destroy lives. Exemptions provided by law are denied creditors. Cases are intentionally, and unreasonably kept open for years. Parties in cases are sanctioned to discourage from pursuing justice.
Contempt of court powers are misused to coerce litigants into agreeing with extortion demands. This does not ensure integrity and restore public confidence.
“The America public, victimized and held hostage by bankruptcy court corruption, have no where to turn.”
It is not surprising that once Ashcroft’s letter gained attention, the Hague yanked it from its website in 2008.
Federal prosecutors are quick to go after the average debtor who may simply make an honest mistake in compiling his/her list of assets while, according to Attorney General Ashcroft, the bigger fish in the bankruptcy corruption pond go unpunished.