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Bankruptcy Fraud

BANKRUPTCY REFERS to the act of declaring one is incapable of paying debts. The laws relating to bankruptcy were designed to protect both individuals and corporations in the event that a financial disaster were to strike; more specifically, the laws were developed to prevent people and companies from losing all of their property. Occasionally, however, a debtor will fraudulently claim bankruptcy. The debtor may attempt to conceal her assets, she may lie about debt, or she may file multiple claims of bankruptcy in an attempt to defraud creditors.

Historically, the filing of a claim of bankruptcy imparted a sense of failure on the part of the debtor. However, as the procedure has become more established in society there has been a 500 percent increase in bankruptcy filings. Of this number, 10 percent involve fraudulent claims. There are four commonly encountered fraud schemes: concealment of assets fraud, petition mills, multiple filing schemes, and bust-out schemes.

Concealment of Assets Fraud

When a debtor files for bankruptcy he is required to list all assets so that creditors will have the opportunity to claim a share of the earnings from the sale of these assets. However, under this form of fraud, the debtor will intentionally neglect to list all assets. The criminal belief is that creditors cannot obtain payment from the sale of assets that are not known.

There are several variations of this scheme. In one variation, the debtor will transfer the assets she wishes to keep to the name and financial accounts of a family member who has good credit. Another variation involves the debtor hiding cash assets in accounts oversees and outside the legal jurisdiction of U.S.-based creditors.

Concealment of assets is the most commonly encountered form of bankruptcy fraud, with over two-thirds of all fraudulent bankruptcy cases invoking variants of the scheme.

Petition Mills

Petition mills take advantage of poor debtors who wish to save their homes. Under this form of fraud, a tenant will be contacted by an agency offering to work with the debtor's landlord to prevent eviction. The debtor then agrees to pay the agency for their services. Many times these agencies have no intention of contacting the landlord. Instead, the agency will take the personal information collected from the debtor and file bankruptcy without the tenants' knowledge. The tenant continues paying the agency, while the agency will extend the eviction process out over several months. By the time the tenant realizes that he has been duped, his credit has been destroyed, his bank account has been drained, and his home has been taken. These operations are seeing increased use in larger metropolitan and urban neighborhoods where the population consists of large numbers of poor people. Some petition mills operations also operate under the guise of creditcounseling services. The activities are similar, only the pretense changes.

Debtors are still charged for the services of the credit counselor who is filing bankruptcy in the debtor's name without permission, instead of working with creditors. In the end, when the scheme is discovered, the debtors will find that counselors have made their credit record worse, and that they have lost the money spent on counseling.

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