The Penalties of Bankruptcy Fraud

Bankruptcy is meant to give consumers who are struggling with debt a safe haven in which to formulate a plan to resolve their financial issues and obtain a fresh start.  In exchange for that safe haven and fresh start, debtors are required to follow the rules and procedures set forth in the Bankruptcy Code.  Some violations will simply result in dismissal of a debtor’s case while others may result in an accusation of bankruptcy fraud. 

What is Bankruptcy Fraud?

Bankruptcy fraud is defined as any act or omission which is meant to hinder or harm creditors.  Bankruptcy fraud is a felony and is punishable by fines of up to $250,000 and a prison sentence of up to five years.  Acts which may constitute bankruptcy fraud include: 

• Concealment of assets;
• Serial bankruptcy filings;
• Making false statements in the bankruptcy petition;
• Making false statements in a bankruptcy hearing;
• Receiving any substantial amount of property from a debtor with the intent to circumvent the provisions of the Bankruptcy Code;
• Falsifying, destroying, or concealing documents related to the property or financial affairs of the debtor; and
• Withholding documents relating to the property or financial affairs of the debtor. 

What About “Honest Mistakes”?

Bankruptcy fraud requires knowing and intentional conduct on the part of the debtor or a third party meant to defraud or otherwise harm creditors.  Honest mistakes by a debtor do not constitute bankruptcy fraud.  However, if the bankruptcy forms contain too many “honest mistakes”, they may be viewed by the bankruptcy court as an indifference to the truth on the part of the debtor and could result in dismissal of his bankruptcy case. 

Notwithstanding the fact that certain mistakes may be viewed as indifference to the truth, a debtor always has the opportunity to amend his bankruptcy petition and schedules to correct an honest mistake.  However, a debtor must be prepared to explain exactly what the mistake was and how or why it was made.

Avoiding Accusations of Bankruptcy Fraud

The Bankruptcy Code imposes on debtors a duty to provide complete and accurate information.  All debtors are required to sign their bankruptcy petitions under penalty of perjury.  Therefore, it’s important that a debtor disclose all of his income, assets, and debts, including debts he may not actually believe he owes.  Moreover, a debtor should closely review his bankruptcy petition and schedules before signing them in order to avoid being accused of bankruptcy fraud. 

Getting Legal Help

Completing the bankruptcy petition and schedules can be very complicated.  Many debtors who represent themselves make mistakes because they don’t understand the forms and they don’t know the law.  Hiring a qualified bankruptcy attorney is the best way to ensure that the bankruptcy forms are completed properly.  Be sure to bring any errors or omissions to the attention of your bankruptcy attorney so that he can correct them before you sign your petition.