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What Are Considered to Be Abusive or Fraudulent Practices in Bankruptcy?

Bankruptcy fraud and abuse is a major problem that impacts creditors and taxpayers alike. More than one million bankruptcy cases are filed annually. With that increase in filings comes a proportional increase in fraud, abuse, and criminal conduct. The Department of Justice approximates that as many as 10 percent of all bankruptcies involve fraud.

Types of Bankruptcy Fraud

The most common types of bankruptcy fraud uncovered in recent prosecutorial initiatives include:

  • concealing assets
  • serial bankruptcy case filings
  • disclosure omissions
  • fraudulent transfers

Concealment under bankruptcy laws is not limited to solely hiding assets; preventing the discovery of an asset and withholding awareness of that asset are included. Debtors have affirmative duties to schedule all estate property in filings. Failure to include an asset in filings can amount to concealment.

Such asset concealment can occur prior to or after bankruptcy filing, although the majority of offenses occur during contemplation of bankruptcy. Other bankruptcy offenses include unreported income, undervalued assets, unscheduled real estate and personal property, and knowingly omitted assets or claims.

The United States Trustee Program

Fortunately, there is a mechanism in place for regulating bankruptcy and safeguarding the system's integrity. That mechanism is the United States Trustee Program. The Trustee Program counts on the Chapter 7 panel trustees in each district to uncover fraud, abuse, and criminal activity, and to refer appropriate cases for criminal prosecution. The trustee program relies heavily upon U.S. attorneys and law enforcement agencies to assist with prosecuting fraud, abuse, and criminal activity in bankruptcy.

The trustee program is understandably heavily invested in this charge and has devoted appreciable resources to the mission. In past years, the number of referrals and resulting prosecutions were low, but thanks to a dedication of more funds, resources, and higher profile efforts, the numbers of prosecutions are on an upswing.

The Department of Justice has affirmed that prosecution of bankruptcy crimes and abuses is a top initiative with its Operation Total Disclosure campaign, initiating with the U.S. Attorney General's Office and trickling down to state and local levels. The IRS Criminal Investigation's Bankruptcy Fraud Program also assists in investigating bankruptcy fraud and refers appropriate cases for prosecution to the Department of Justice.