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Bankruptcy is a complex, multi-stage process, but at its heart, can be boiled down into two critical phases: filing for bankruptcy, which is the process of submitting your legal documentation to the bankruptcy court, and the bankruptcy discharge, which releases the debtor from his or her liability for medical debt, credit card debt, and other dischargeable debts.  Needless to say, discharge is the ideal outcome of any bankruptcy case.  However, if you commit acts of fraud, your case can be dismissed instead of discharged, which means you will remain responsible for the debts you were trying to erase.  In this article, our Philadelphia Chapter 7 lawyers provide some examples of bankruptcy fraud – and the consequences it can lead to for the debtor.

What is the Legal Definition of Bankruptcy Fraud?

Like most legal terms, bankruptcy fraud has an explicit definition, which is set forth by federal law under 18 U.S.C. § 157 (in which the “U.S.C.” simply refers to “U.S. Code”).  This statute prohibits filing a bankruptcy petition or any other bankruptcy-related document, or making any claim or statement in connection with bankruptcy, with intent “to devise a scheme… to defraud” and “for the purpose of executing or concealing such a scheme.”  Stated more simply, 18 U.S.C. § 157 makes it illegal to lie, fabricate information, or hide information at any stage of the bankruptcy process.

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The aforementioned statute repeatedly refers to “title 11,” not to be confused with Chapter 11 bankruptcy, which is generally utilized by large corporations.  Title 11 of the U.S. Code contains the federal laws concerning all chapters of bankruptcy, including Chapter 7 bankruptcy, Chapter 13 bankruptcy, Chapter 12 bankruptcy, and Chapter 11 bankruptcy.  Committing fraud as it is defined under 18 U.S.C. § 157, in any type of bankruptcy case, can compromise your ability to obtain a discharge – and, even more seriously, potentially lead to criminal prosecution.

In fact, the Internal Revenue Service (IRS) keeps careful track of annual bankruptcy fraud prosecution statistics.  These statistics reveal that, while bankruptcy fraud investigations are relatively few and far between, they often lead to criminal convictions in the rare instances in which they do occur.  According to IRS bankruptcy fraud statistics on the 2016 fiscal year:

  • 29 investigations were initiated.
  • 19 of those investigations (nearly 66%) led to recommendations for criminal prosecution.
  • 18 of the 19 prosecutions resulted in the defendant being sentenced to prison.
  • Defendants who were convicted of bankruptcy fraud served an average prison sentence of 17 months, or about a year and a half in prison (with a maximum five-year sentence established by 18 U.S.C. § 157).

What Are the Most Common Types of Bankruptcy Frauds?

There are many ways a debtor can commit bankruptcy fraud.  For example, the IRS recently published an account of one Illinois resident who, on October 3, 2016, was sentenced to more than two years in prison after committing bankruptcy fraud by making false statements on loan applications, then transferring funds between bank accounts in an effort to conceal the fraud.  When the man later filed for bankruptcy, he gave false testimony during the meeting of creditors (341 meeting) “by stating he did not own any real estate other than what he had listed in his bankruptcy schedules, and that he did not own a car, when in fact he owned a home and a vehicle.”

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Bankruptcy fraud can involve various actions, such as misusing credit cards, filing for bankruptcy in multiple states, using a false identity, or failing to file necessary forms.  However, the number one most common way filers try to commit bankruptcy fraud is by hiding their assets, otherwise known as “asset concealment.”

What is Concealment of Assets?

When you file for bankruptcy, you are required to list your assets for financial assessment by the trustee appointed to your case.  The logic behind asset concealment – at least from the filer’s point of view – is that the trustee cannot sell or liquidate anything he or she is unaware of.  However, we live in an increasingly digitized world, and asset concealment is virtually impossible in today’s age of sophisticated computer forensics.  If a debtor is caught or suspected of concealing, attempting to conceal, or simply understating the true worth of a boat, car, house, piece of land, piece of jewelry, or other asset or possession, the bankruptcy court or trustee may dismiss the case – and notify law enforcement.

Philadelphia Bankruptcy Attorneys Handling Chapter 7 and Chapter 13 Cases

The vast majority of debtors are honest, hard-working people who simply need help rectifying a tough financial situation.  However, even with the best of intentions, it is very easy for a debtor to make a mistake or omit vital information, particularly in more complex forms of bankruptcy such as Chapter 13.  In order to protect yourself from inadvertently making a serious error on your bankruptcy paperwork, it is wise to seek help from an experienced Philadelphia bankruptcy attorney, who can maximize the speed, ease, and efficiency with which your case can be resolved.

The highly experienced legal team at Sadek & Cooper Law Offices has handled thousands of bankruptcy cases throughout Southeastern Pennsylvania, and features:

To learn more about the benefits of filing for bankruptcy in Pennsylvania in a free and confidential legal consultation, contact our law offices at (215) 995-2543 today.