What Constitutes Bankruptcy Fraud?
Virtually all financial activity carries with it the risk that people will attempt to commit fraud. Bankruptcy is no exception. There are several ways in which the unscrupulous can attempt to work the system in bankruptcy. They face severe repercussions if they are caught.
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Types of Bankruptcy Fraud
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According to Cornell University's Legal Information Institute there are four main types of bankruptcy fraud. These include multiple filings, concealing assets, incomplete petition filing and trustee bribery. The most common type of bankruptcy fraud is simply concealing assets. Debtors engage in this in an attempt to prevent these assets from being sold to pay creditors money owed.
Petition Mills
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One form of bankruptcy fraud within the incomplete filing type of fraud is petition mills. In this type of scam the fraud artist will represent himself as a financial adviser and offer to help a debtor to, for example, save his home by negotiating with a landlord. But in fact the fraudster will file bankruptcy on behalf of his unknowing victims. Similarly, some debt consolidation agencies engage in the same type of practices. Victims make payments that they believe will help pay down their debt and improve their credit but in fact their credit is worsened by the bankruptcy, their debts are not paid, they lose their home and the con artist absconds with their money.
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Bust Out Schemes
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Bankruptcy fraud is often connected with other types of fraud such as money laundering, criminal corruption, mortgage fraud and identity theft. Bust out schemes were not historically considered bankruptcy fraud. In a bust out scheme the criminal will borrow as much as he is able to and max out his credit with no intention of ever repaying the debt.
Penalties
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Bankruptcy fraud is both a civil and a criminal matter. Punishment for committing bankruptcy fraud is up to five years in prison and $250,000 in fines. In recent years there has been greater emphasis on persecuting those professionals such as accountants that assist in the fraud. The IRS is seeking to reduce bankruptcy fraud by measures such as increasing voluntary compliance with the law and increasing IRS staff presence among bankruptcy professionals.
Significance
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Bankruptcy, in its current form, serves to help and protect people who have fallen on severe financial hardship. In light of this, it is particularly deplorable that people choose to exploit this area of legal protection for their own advantage. According to the Encyclopedia of White-Collar & Corporate Crime, there has been a 500 percent increase in bankruptcy filings and of these filings 10 percent involve some form of fraud.
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References
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