Don't think bankruptcy fraud goes unpunished. In 2014, reality-TV stars Joe and Teresa Giudice were sentenced to 3.5 years and 15 months in jail, respectively, for bankruptcy and loan fraud (They pleaded guilty to hiding assets from bankruptcy court and lying on mortgage and loan applications, among other charges) [source: CNN].
And Major League Baseball player Lenny Dykstra was sentenced to six-and-a-half months in prison and 500 hours of community service, and had to pay $200,000 in restitution after he was found guilty of fraud. His crime? After filing for bankruptcy in 2009, he sold household items from one of his multimillion-dollar mansions, plus baseball memorabilia, and pocketed the proceeds [source: Wilson].
Whether or not you go to jail depends on if your fraudulent actions are deemed civil or criminal acts. Civil acts are generally small in scope and involve less deception. The typical penalty is the loss of your bankruptcy exemptions and the forfeiture of your discharge rights. What does that mean?
When you file for bankruptcy, some of your property will be exempt from the proceedings, meaning you can keep the items. If your exemptions are taken away, that property can now be sold to pay off your creditors. Debt discharge rights are given to you when your bankruptcy proceedings are over. A debt discharge means you are debt-free; your creditors can't try to get money from you anymore. If your discharge rights are forfeited because of civil fraud, your creditors can still sue you [source: Criminal Defense Lawyer].
Criminal fraud penalties are much stiffer. To be charged with this crime, it must be proven you acted with a knowing and fraudulent intent, misrepresenting material facts. If that happens, you'll be facing a federal prison sentence of up to five years, a fine up to $250,000 or both. The five years, by the way, is per offense. So if you've committed three acts of bankruptcy fraud, you're looking at up to 15 years in the slammer. Ditto with the fine, which can be levied per act of fraud. If you're lucky, you may just be placed on probation [source: Cornell LII].
As with any crime, those committing bankruptcy fraud aren't acting in a vacuum. Their actions hurt others. Bankruptcy fraud throws suspicion over anyone using the process, including honest citizens. It drives up credit card and loan fees. It even can jack up our taxes [source: Federal Bureau of Investigation]. And who wants higher taxes? Better to pay what you owe and make the most of your fresh start.
Author's Note: How Bankruptcy Fraud Works
It's great that much of the stigma is gone from bankruptcy. After all, many honest, hard-working people can find themselves needing to use this governmental safety net. It's too bad others have to abuse the system.
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