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Hiding Assets and Bankruptcy Fraud

Bankruptcy fraud is treated very seriously by the federal government. Federal law prohibits nine separate activities during bankruptcy.

18 U.S.C. 152 prohibits the following nine acts in relation to a bankruptcy case for any person who may attempt to keep assets from being equitably distributed amongst creditors in the bankruptcy.

  1. Concealing property that belongs to the debtor’s estate
  2. Making false accounts or oaths
  3. Making a false declaration or statement while under the penalty of perjury, i.e. under oath
  4. Making false claims against the debtor’s estate
  5. Fraudulently receiving property from a debtor
  6. Extortion or bribery in connection to the bankruptcy case
  7. Concealing or transferring property in contemplation of bankruptcy
  8. Concealing or destroying documents that relate to the debtor’s property or affairs
  9. Withholding documents from bankruptcy administrators

Each of these can be charged as a separate crime and carry their own penalties. Other types of bankruptcy fraud include filing for bankruptcy in multiple states and bribing your court-appointed trustee. These and the nine charges listed above are frequently charged with other white collar crimes such as mortgage fraud, identity theft, public corruption and money laundering.

Elements of bankruptcy fraud

Each of the nine acts of bankruptcy fraud listed above must be done both “fraudulently” and “knowingly.”

  • Fraudulently—the act was done with the intent to deceive
  • Knowingly—the act is voluntary and intentional
    • The federal Third Circuit court has ruled that a person does not have to know they are breaking the law in order for their actions to qualify as “knowing.”
    • So, an accidental error in preparing your information for bankruptcy would not meet the fraudulent prong and thus is not fraud. However, if you intended to hide or deceive information and voluntarily, intentionally did something you thought was legal to help accomplish that, both elements are met and your activity could be found fraudulent in the context of a bankruptcy case.

Even if you are not criminally prosecuted with one of the above charges of bankruptcy fraud, at a minimum any bankruptcy case where fraud is proven is thrown out of court. In most cases, depending on the severity of the crime and size of the debt, the court will also refuse to discharge, or cancel, the person’s debts. Sometimes they will also extend this to any future bankruptcies.

In addition, because fraud is a federal crime, the penalties for any of the above charges are fines up to $250,000 and/or up to five years in prison—for each charge. However, more than one offense cannot be charged based on the same set of facts.

Hiding Assets: The Fraud of Choice

Numbers 1, 7 and 8 from the list of bankruptcy fraud crimes above all pertain to the most common form of bankruptcy fraud. Concealing property from the debtor’s estate, concealing or transferring property in contemplation of bankruptcy, and concealing or destroying documents all describe different way to hide assets.

Computerized documentation these days makes it virtually impossible to not be caught if you are withdrawing or transferring funds from any kind of financial institution. Any property that is licensed or titled will most likely have a digital trail. These prohibitions include giving certain assets or funds over to someone else in order to regain them later after the bankruptcy is complete.

So, don’t think that selling your brother your Harley for cheap will protect it from creditors. Bankruptcy filers have to list everything they have transferred, sold or given away in the past two years. In addition, a bankruptcy trustee has the power to sue to recover any money that you have paid to “insiders” (relatives, friends and business partners) within the year before you filed.

A legal alternative to hiding your assets in bankruptcy is to negotiate the amount you pay back with your creditors.

What if someone suspects me of fraud but can’t prove it?

If a creditor, trustee, or anyone else in a bankruptcy case suspects fraud but does not have enough evidence to allege it in court, he or she can require document production and testimony through what is called a Rule 2004 Examination.

Rule 2004 of the Federal Rules of Bankruptcy Procedure gives “any interested person” the power to compel another person to testify or produce documents related to a bankruptcy. The tool is as broad as it sounds and can cover a wide range of issues, including your debts, property and financial condition, your actions and conduct, and any issue that relates to your bankruptcy assets or right to a discharge, or cancellation, of a debt.

If you are contemplating bankruptcy or are being criminally charged with bankruptcy fraud, it is important to retain an attorney experienced in that area of law. Arnold & Smith, PLLC has attorneys with experience in each.