If you’ve been alive for the last few years, you’ve probably heard at least a little something about bankruptcy fraud.
The usual story revolves around a guy who used to be rich (or at least rich by your town’s standards) and now he’s down on his luck. Maybe his business failed, or he spent way too much money on his mansions and pet tigers. Regardless of the cause, the effect is that he’s now broke and he’s forced to file for bankruptcy.
But wait! It turns out that he might not have been all that honest about everything he owns. There was that Cayman Islands account with hundreds of thousands of dollars in it. It must have slipped his mind when his attorney asked him to disclose all of his assets.
Interestingly, he just happened to have transferred the title of his Ferrari into his son’s name right before filing. And the house that he “owned” was actually owned by some sort of holding corporation.
We really have to feel sorry for the guy. With all those millions and and all of that property, it’s really easy to forget a few details. A good bankruptcy attorney (and with his kind of money we have to assume he hired a good one), will thoroughly review all of the assets a bankruptcy filer has prior to filing – but there is only so much an attorney can do. He or she still has to rely on the honesty of the client for a complete financial picture. Consequently, if someone accidentally or deliberately fails to tell an attorney about an asset or a property transfer, the attorney may never know it exists, but that doesn’t mean the court won’t find out once it starts to investigate a case.
This Is Where The Trouble Begins
So that poor guy who is down on his luck just can’t catch a break.The court starts sniffing around his personal affairs and it turns out he just plum forgot about that yacht he owns. After all, it’s not even titled in his name. Some trust to which he is loosely connected owns it. If that nosey court hadn’t traced back where the money came from that was used to buy the yacht, no one would ever have known he had anything to do with it. Life is so unfair.
When the next day comes around, we hear that this guy is now wallowing away his time in jail somewhere. Ooops – actually he would have been, but somehow he was able to come up with enough money to pay his bail. So he’s on house arrest. And that’s where the real suffering begins. He’s having to have all his meals catered at home. His nightly visits to Spago’s have completely dried up, and few of his friends come to call.
But alas, our formerly wealthy and happy rich guy got convicted. Now he’s spending his days and nights in prison. There’s no more catered meals for him, and when his friends come to visit, some scary-looking guards are standing there listening in on his conversations. How rude!?
Don’t Be The Guy Who Did What This Guy’s Done
Okay – so not all bankruptcy fraud scenarios are the same. They don’t always involve the stereotypical rich guy from above. At first glance, this might seem reassuring, but actually it’s exactly the opposite. Since it’s not reserved just for the rich, bankruptcy fraud and its penalties are available for all who file – including you.
In reality, how do you get in trouble like he did? The good news is you don’t go to prison just for mistakes that you might have made on your bankruptcy petition. Also, you’re not going to get in trouble if your attorney makes a mistake through no fault of your own. In most cases, to get in trouble like this hypothetical rich guy, you’ve got to go out of your way to deliberately do something wrong, and usually you’ve got to do A LOT wrong to end up like he did.
The Path To Potential Destruction And How To Avoid It
The bankruptcy process for most of us is a fairly simple one. We don’t have to review the entire thing step by step, but what’s key is the process where you disclose your assets to your attorney. He or she is going to sit down with you and go over what you own in detail. Depending on your attorney’s particular process, you are likely to go over this at least once verbally, and once in writing. If there is something you forget about, you can always alert your attorney at a later date to be sure an asset is included.
What if I forget something after my case is filed? You can still reach out to your attorney about this. He or she may file an amendment to your petition, and if it’s right before your meeting of creditors, he may just let the bankruptcy trustee know during the hearing. Any way you look at it, you’ve got all kinds of time to disclose all of your assets.
What Assets Do I Include?
This is really simple. You disclose absolutely everything that you own. Period.
It really is that easy. You need to rack your brain and think of absolutely everything you own, including things like cash, stocks, bank accounts and the like. You also have to disclose any assets that you recently transferred to someone else, even though technically you no longer own them.
In truth, your brain does not really require racking though. Your attorney is going to have you bring in tax refunds, bank statements, pay stubs, and all sorts of other documentation. This will reveal to him (and refresh your memory) of most of what you own. Certain assets may not show up, like cash or stocks, but your attorney will provide a racking-worthy list for you to peruse. Just in case something slips your mind. Here’s an example for you from yourdictionary.com
- Cash on deposit
- Cash on hand
- Certificates of deposit or CDs
- Commercial paper
- Corporate bonds
- Corporate stock
- Debentures held
- Federal agency securities
- Federal treasury notes
- Guaranteed investment accounts
- Loans to members of insurance trusts systems
- Loans receivables
- Marketable equity securities
- Marketable securities
- Money market funds
- Mortgages (receivable) held directly
- Mutual funds
- Notes receivables
- Repurchase agreements
- “Restricted” cash and investments
- Savings accounts
- Share of funds in governmental investment accounts or pools
- State and local government securities
- Time deposits
- Warrants (to purchase securities)
- Accounts receivable
- Brand names
- Brand recognition
- Broadcast licenses
- Buy-sell agreements
- Chemical formulas
- Computer programs
- Computerized databases
- Cooperative agreements
- Customer relationships
- Designs & drawings
- Distribution rights
- Development rights
- Distribution networks
- Domain names
- Drilling rights
- Engineering drawings
- Environmental rights
- FCC licenses
- Film libraries
- Food flavorings & recipes
- Franchise agreements
- Historical documents
- Joint ventures
- Laboratory notebooks
- Landing rights
- Loan portfolios
- Location value
- Management contracts
- Manual databases
- Medical charts and records
- Mineral rights
- Musical compositions
- Natural resources
- Procedural manuals
- Product designs
- Property use rights
- Proprietary technology
- Royalty agreements
- Schematics & diagrams
- Securities portfolios
- Security interests
- Shareholder agreements
- Solicitation rights
- Supplier contracts
- Technology sharing agreements
- Title plants
- Trade secrets
- Trained & assembled workforce
- Training manuals
- Use rights – air, water, land
- Checking account
- Collectibles Electronics Insurance
- Investment accounts
- Retirement account
- Savings account
So you can see, after looking at that list, it would be difficult to miss something. We say difficult because mistakes can happen. Plus, filing for bankruptcy can be a stressful time for many, and during stress our brains don’t always work. But time is on your side. It would be extremely unusual to step into your attorney’s office and file on the same day. So relax, take your time and review your paperwork at a later date. Something is bound to jog your memory along the way
What Happens When there is Bankruptcy Fraud?
By now it should be pretty obvious that it’s going to be next to impossible to forget to include an asset. So we are going to move forward with our discussion assuming that an asset was deliberately left off of a bankruptcy petition, or that some other fraud took place, such as a transfer of an asset that was not disclosed/allowed by the court. When that occurs, what kind of penalties will you possibly face?
Bankruptcy is federal law, and as such we look to the federal statutes to know what the penalties are. The law states that bankruptcy fraud is punishable by up to five years in prison and a fine of up to $250,000. It’s serious stuff.
This doesn’t mean that if you commit fraud you are automatically thrown in prison for five years and you owe the government a quarter of a million dollars. The court rarely hands out the maximum amount for these penalties/jail time. It’s up to the court’s discretion. But is this something worth risking?
Some of the more clever of you out there may wonder if some of that $250,000 could be eliminated by your bankruptcy. Long may you dream to think so! No. If you commit fraud against the court, they aren’t going to allow you to eliminate that debt through the system you tried to defraud in the first place. As a matter of fact, almost none of the court fines you may have – bankruptcy or otherwise – can be eliminated by filing for bankruptcy.
Bankruptcy fraud is hard to do. You’ve really got to go out of your way to commit fraud. Consequently, it’s easy to avoid. And considering how steep the potential penalties and jail time are, it’s hard to believe that anyone ever commits bankruptcy fraud. But just read the news and you’ll see that it happens all the time.