Bankuptcy Fraud Criminal and Civil Liabilities

Bankruptcy is a system established with a purpose of giving debtors a “fresh start”. As any system, it’s prone to abuse and there are is a set of federal statutes that provide for civil and criminal penalties for what the law considers to be bankruptcy abuse or fraud.

Bankruptcy fraud is most commonly detected where debtors are less than honest in the preparation of bankruptcy documents such as petition, schedules, and statements, which are submitted under penalty of perjury. Another opportunity to be accused of bankruptcy fraud is during the meeting of creditors where the debtor, placed under oath, testifies regarding their financial situation. Debtors who submit false testimony will also face criminal or civil penalties.

Besides debtors, third parties may also sometimes be accused of bankruptcy fraud. For example, in the case of a debtor corporation, corporate shareholders, officers, partners, employees, agents, and fiduciaries may be subjected to criminal sanctions both under the Bankruptcy Code and other federal and state criminal statutes.

There are many methods that are used to investigate debtor’s claims, including examination of submitted documents and oral examination. Debtor’s affairs are investigated by trustees or creditors’ committees who have broad authority to conduct such investigations. Federal Bankruptcy Rule 2004 is commonly used to verify debtor's information. This Rule provides that, on demand of any party in interest, the court may order the examination of any entity. The Rule is so effective that it’s called examinations conducted under it are called ''fishing expeditions’’ because of its ability to expose fraud. A Rule 2004 examination is ordered by Court and debtors who fail to appear or submit documents will be held in contempt by court.

An investigation during bankruptcy process is extremely serious business. The investigating bodies employ accountants, brokers, appraisers, and other professionals to valuate debtor’s affairs.

If fraud is detected, there could be various civil and criminal penalties. Civil remedies may include (1) denying a debtor a discharge of debt; (2) disallowing certain transfers or recovering the transferred property or its value; (3) the appointment of a trustee or an examiner; (4) the dismissal or conversion of the debtor's case. Creditors are actually encouraged to discover fraud. They are statutorily guaranteed financial rewards if they do.

Criminal statutes that address bankruptcy fraud are 18 U.S.C. Section 152 that specifically prohibits knowingly and fraudulently (1) concealing property of the estate; (2) making a false oath or account; (3) making a false declaration, verification or statement under penalty of perjury; (4) presenting or using a false proof of claim against a debtor estate; (5) receiving, post-petition, a material amount of property from a debtor with intent to defeat the provisions of the Bankruptcy Code; (6) offering, receiving, or attempting to obtain consideration for acting or refraining from acting in a case under the Bankruptcy Code; (7) transferring or concealing property in contemplation of a bankruptcy case or with intent to defeat the provisions of the Bankruptcy Code; (8) post-petition concealment or alteration of records; and (9) post-petition withholding of a debtor's records.

The statute applies to anyone who commits any of the above including debtors, creditors, fiduciaries and anyone else.

Section 153 of Title 18 makes it a crime for anyone to appropriate to their own use, embezzle, spend, or transfer any property belonging to a debtor's estate, and any actions of the same ''persons'' if they secret or destroy any document belonging to a debtor's estate.

Section 155 of title 18 prohibits knowing and fraudulent agreements that are aimed at fixing compensation in bankruptcy cases.

Section 157 of Title 18 is actually entitled ''Bankruptcy Fraud'' prohibits a person from (1) filing a bankruptcy petition; (2) filing a document in a bankruptcy case or proceeding; or (3) making a false or fraudulent representation, claim, or promise concerning or in relation to a prepetition or pending bankruptcy case or proceeding (or a proceeding falsely asserted to be pending) if these acts are done as part of the scheme to defraud.

Other bankruptcy fraud criminal charges may include tampering with or falsifying records (18 U.S.C. Section 1519).