Bankruptcy Fraud * Chapter 7 Fraud * Bankruptcy Fraud Cases * Chapter 7 Proceedings * Chapter 13

Bankruptcy Fraud Rarely Caught and Prosecuted

Last Updated: March 8, 2011

An article on the website assetrecoverywatch.com recently explored the low rate of both bankruptcy audits and prosecution for those individuals who hide assets during the bankruptcy process.

Bankruptcy Fraud Cases Submitted

In fiscal 2008, the United States Trustee Program (USTP) handled 993,815 bankruptcy cases and filed only 1,810 criminal referrals, due to false statements, concealment of assets, and other illegal activity. If these, Trustees also identified 45 cases in which a bankruptcy filing was made using a false identity. That is equivalent to a rate of 0.148%, meaning that less than one and one-half criminal referrals were made for every thousand bankruptcy filings the USTP handled.

In that same year, the Program made a point of noting in its report to Congress that criminal referrals were up 27% over the previous fiscal year, when 1,163 referrals were forwarded to federal prosecutors.

Means Test Failures are not Considered Fraud. There's a difference between having your request denied or revoked because you fail your means test. In another 4,372 cases, trustees filed to dismiss bankruptcy claims because a "means test" applied to debtors indicated that they were not eligible to file.

Fraud Cases Prosecuted. Though 1,810 actions for illegal bankruptcy files plus the false identity cases were brought to the DOJ, the Department of Justice in 2008 filed only 18 prosecutions in which bankruptcy fraud was the lead charge.

Bankruptcy Fraud is Quite High

The United States Department of Justice (DOJ) estimates that one in every ten bankruptcy filings has an element of fraud associated with it. A USTP audit of fiscal 2008 993,815 bankruptcy filings found "material misstatements of income or expenditures" in 21% of cases, but only and filed 1,471 criminal referrals. That is equivalent to a rate of 0.148%, meaning that less than one and one-half criminal referrals were made for every thousand bankruptcy filings the USTP handled.

The DOJ estimates that fraud occurs in 10% of filings, and given the low number of criminal referrals, the question can be asked: "How well are trustees doing at detecting that fraud?" The number of referrals is really low and we ought to be looking at why, said a DOJ spokesman. Is bankruptcy fraud not occurring? Or are bankruptcy trustees either not competent to detect it or not making the effort to detect it?"

How Many Referral Should be Presented: 9998.15
How Many Referral Actual Are Presented: 1,471

Reasons for Bankruptcy Fraud

Criteria For Asset Detection Absent. The agency claims that "detecting and combating bankruptcy fraud is a U.S. Trustee Program priority". The trustees appointed by the Justice Department to oversee almost every bankruptcy filed in the U.S. are not required by law or regulation to have any expertise in tracing or recovering concealed or stolen assets. Indeed, criteria that individuals seeking appointment as a U.S. Trustee are required to meet contain no mention of the sort of asset tracing and recovery skills that would enable a trustee to detect the signs of fraud.

Professional Qualifications According to the Code of Federal Regulations, there are relatively few professional qualifications required for appointment to the panel of trustees charged with overseeing filings under Chapter 7 of the bankruptcy law or to appointment as a standing trustee. Attorneys admitted to practice before the highest court of a state or the District of Columbia are eligible, as are Certified Public Accountants.

However, those without such professional qualifications can still be eligible for appointment if they graduated from a four year college and earned at least 20 credit hours of "business-related courses."

What Experts Say About Bankruptcy Fraud

"The numbers don't surprise me terribly," the article quotes James W. Boyd, a Traverse City, Mich. attorney, currently president of the National Association of Bankruptcy Trustees.

"I think the USTP system is very aggressive in its pursuit of these matters, and I think most trustees are quite aggressive when they see what they believe is an intentional fraud committed on the system by the debtor, they are referring them to USTP," he said.

However, Mr. Boyd stated that asset "mistakes" or "misstatements" about assets have to be viewed in context. Many personal bankruptcies involve individuals with little education in legal matters and little ability to hire experienced counsel. (Bankruptcy trustees are barred from providing advice to filers.)

Really? People don't know that they should report that they have 3 cars? Report they own lots of gold jewelry, boats or stocks? What about their bankruptcy attorneys? The trustees may not be able to advise filers - but don't the attorneys explain to their clients what has to be included as assets?

Conclusion

If you are hiding assets from trustees during your Chapter 7 bankruptcy proceedings, you have a one in one thousand shot in not being detected in the current system of trustees. I'm not sure how much press this has gotten or if the public cares. In seems that in these times of economic crisis, this should be taken care of.

We found some statistics from this article on the average amount for filings in 2007 - 2008. Depending on the state, the amount of individual filings range from $25,000 to $11,000. If we just take the average of these two numbers, which is $18,000 - this means that:

8527 (cases not caught) * $18,000 = $153,486,000 (153.5 million dollars) of assets are potentially not recovered due to a poorly trained or understaffed US Bankruptcy Trustees. This amount is not going to solve our deficit problems or balance the budget, but the cost to the country is not insignificant.

Also, searching the US Bankruptcy Trustee Court website, we found a document stating only 1 out of 1000 files are randomly selected for audit.

Statistical Data