How Bankruptcy Fraud Works

Common Forms of Bankruptcy Fraud

The concealment of assets is by far the most common form of bankruptcy fraud, comprising nearly 70 percent of all cases [source: Cornell University Legal Information Institute]. If a debtor doesn't want a particular item to be sold to pay a creditor, he just leaves it off his list of assets. Similarly, he may hide items through fraudulent transfers; e.g., giving assets to someone else to temporarily keep, like the previous example of giving your diamond ring and recliner to your daughter. In that case, both you and your daughter would be guilty of bankruptcy fraud, assuming she knew you were trying to shield those assets by giving them to her [source: Criminal Defense Lawyer].

Another fast-growing form of bankruptcy fraud is perpetrated by "petition mills" on people facing eviction or foreclosure. These scam businesses offer to keep you in your home for a fee or may even ask you to pay your mortgage to them. But once they have your money, they simply open a bankruptcy filing in your name, sometimes without telling you. While the filing can temporarily stop an eviction or foreclosure, if you don't get on board with the bankruptcy and proceed (perhaps because you don't know about it), your case will be dismissed and the eviction or foreclosure will resume [source: The United States Department of Justice].

Other forms of bankruptcy fraud include the following [sources: Cornell LII, Criminal Defense Lawyer]:

  • Making false statements to the court. Even leaving questions unanswered in your bankruptcy petition can be considered making a false statement.
  • Filing multiple bankruptcy petitions in several states. Cheats sometimes use real names and info or a combination of true and false data. This can provide more cover if you're trying to hide assets. It also slows down the bankruptcy processing and liquidation of assets.
  • Starting a business and purchasing items on credit. If you do so with the intent of filing for bankruptcy instead of paying for the items, that's fraud.
  • Bribing your court-appointed trustee. One of the more heinous forms of fraud, filers offer money or favors if their case is approved. Debtors sometimes try to bribe creditors, too, persuading them not to file claims in exchange for cash.
  • Creditor lying. Sometimes creditors commit fraud, filing false claims or lying about the repayments they've already received from the debtor.
  • Embezzlement. Trustees, attorneys or court personnel may embezzle some of the money in a debtor's bankruptcy estate.