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Bankruptcy Fraud - Bankruptcy Criminal Referrals by the U.S. Department of Justice

Bankruptcy Fraud - Rarely Caught and Rarely Prosecuted

Last Updated: May 10, 2016

Bankruptcy fraud is a white-collar crime and there are four distinct methods of committing bankruptcy fraud:

  1. Concealment of assets
  2. Intentionally filing incomplete or false forms
  3. Filing multiple times using false or real information in several states
  4. Bribing a court-appointed Trustee

In the United States, bankruptcy fraud is a federal crime punishable by a fine of up to $250,000 and/or up to five years in prison. But even with these harsh consequences, bankruptcy fraud is not frequently prosecuted. Let's find out more about the different types of fraud and then why the majority of people get away with it.

Bankruptcy Criminal Referrals Submitted

According to the United States Courts, bankruptcy cases filed in federal courts for fiscal year 2014 (12-month period ending September 30, 2014) totaled 963,739, down 13 percent from fiscal year 2013, which saw 1,107,699 bankruptcy filings.

According to a report by the U.S. Department of Justice, in fiscal year 2014, the United States Trustee Program (USTP) filed 2,074 bankruptcy and bankruptcy-related criminal referrals, a 2.2 percent decrease over the 2,120 criminal referrals made during fiscal year 2013. The five most common allegations contained the following:

  1. Tax fraud
  2. False oath or statement
  3. Concealment of assets
  4. Bankruptcy fraud scheme
  5. Identity theft or use of false/multiple Social Security Numbers

Outcomes of Criminal Referrals

Out of the 2,074 criminal referrals made in fiscal year 2014, 1,296 referrals remained under investigation or review, 10 referrals resulted in formal charges, 766 referrals were declined for prosecution, and two were administratively closed.

Is Bankruptcy Fraud on the Rise?

The United States Department of Justice estimates that one in every ten bankruptcy filings has an element of fraud associated with it and 25 percent of cases were found to contain "material misstatements of income or expenditures." The USTP does not publicly disclose what specifically constitutes a material misstatement but the term may refer to an understatement or omission of a debtor's assets or income.

According to an article in The Wall Street Journal, the arm of the Justice Department that monitors corporate and consumer bankruptcy filings has "indefinitely suspended" audit proceedings due to budget cuts. According to Mr. Talbot, a senior VP for the Financial Services Roundtable, "The audits are designed to catch and prevent abuse. The absence of the audits could lead to more instances of abuse of the Bankruptcy Code."

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Reasons for Bankruptcy Fraud

Criteria For Asset Detection Absent.  The agency claims, "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, Michigan 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 three 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. We are not sure how much press this has gotten or if the public cares. 

Statistical Data - Bankruptcy Fraud

  FY 2014 FY 2013 FY 2012

Investigations Initiated

44 28 23

Prosecution Recommendations

25 8 13

Indictments/Informations

12 7 20

Sentenced

8 12 9

Incarceration Rate

75.0% 91.7% 77.8%

Avg. Months to Serve

53 47 17

Source: IRS website.


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