Federal Bankruptcy Fraud
Federal Bankruptcy Fraud is a serious white-collar offense that is aggressively prosecuted by the U.S. Attorney’s Offices across the country. A debtor or a third party charged with bankruptcy fraud is subject to criminal charges as well as civil penalties. Importantly, not every mistake on a bankruptcy petition will subject you to a criminal charge. Rather, the Assistant U.S. Attorney must show that you (or a third party) intentionally and knowingly misrepresented or omitted material facts in a bankruptcy petition or proceeding.
Federal Bankruptcy Fraud Statute
The federal bankruptcy fraud statute is codified Section 152(1) of Title 18 of United States Code.
18 U.S.C. 152(1) states that a person who “knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under Title 11, from creditors or the U.S. Trustee, any property belonging to the estate of a debtor . . . shall be fined under this title, imprisoned not more than five years, or both.”
To prove that a debtor is concealing property in violation of 18 U.S.C. 152(1), the Government must prove the following elements beyond a reasonable doubt:
- Knowing and fraudulent intent of the debtor;
- Concealment of any property belonging to the estate of the debtor;
- In connection with a bankruptcy case;
- From creditors, or the U.S. Bankruptcy Trustee.
Types of Federal Bankruptcy Fraud
Federal bankruptcy fraud can be broken up into these four categories:
- Concealing or hiding assets from the bankruptcy trustee;
- Knowingly and intentionally filing a false, fraudulent or incomplete bankruptcy petition;
- Repeated bankruptcy filings;
- Bribery or extortion of any party to a bankruptcy proceeding.
Concealing or Hiding Assets
The first type of federal bankruptcy fraud is the concealing, hiding, or transferring assets in an effort to avoid the assets being a part of the bankruptcy proceeding. The bankruptcy trustee can only liquidate and distribute assets to the creditors that the trustee knows about. Thus, any assets that are concealed or hidden from the trustee, would remain in the debtor’s possession. Frequently, the bankruptcy petitioner will transfer the assets into the names of their family members of friends to hide them from the bankruptcy proceeding. This is known as “fraudulent transfers” or “fraudulent conveyances.”
There are two types of fraudulent transfers or fraudulent conveyances. They are:
- Actual fraudulent transfers, AND
- Constructive fraudulent transfers.
Which Asset Transfers Can Fall Under Bankruptcy Fraud?
Federal bankruptcy laws look into many different types of transfers, including:
- Creation of a lien;
- Retention of title as a security interest;
- Foreclosure of a debtor’s equity of redemption;
- Any type of disposing of or parting with property or an interest in property.
Actual transfers are those that are made with actual intent to defraud creditors. An example of an actual fraudulent transfer is gifting your house to your sister without getting anything in return for it. Your intent is to hide the house, or more specifically, the equity in the house from your creditors.
When Does Actual Fraud Exist?
Bankruptcy courts have developed “badges of fraud,” or circumstances that are indicative of actual fraud in a bankruptcy proceeding. Some of the common badges of fraud are:
- Debtor is in litigation or is facing litigation;
- Debtor has transferred all or almost all of his/her property;
- Debtor has retained possession or control of the property despite the transfer;
- Debtor has a special relationship with the transferee of the property (i.e. related by blood or marriage, business relationship);
- The transfer was not a result of an arms length negotiation (for example private sale of house, rather than listing it with a broker and receiving multiple offers);
- Transfer was not disclosed;
- Transfer was a gift, or otherwise lacked adequate compensation.
What Happens If One Or More “Badges Of Fraud” Are Present?
Usually, the presence of more than one badges of fraud is necessary to begin the inquiry into the legitimacy of the transfer. However, it is the totality of the circumstances that is taken into account to determine if actual fraudulent intent existed. Once the presumption of actual intent arises, the burden shifts to the debtor to prove that the transfer was not made with intent to defraud. The
Constructive transfers, are those made in exchange for less than equivalent or adequate value or consideration. Rather than gifting your home to your sister, like you would in an actual fraudulent transfer, you sell your home to your sister for half of what it would sell in an open market. Effectively, doing so preserves half of the house value from your creditors. However, both actual and constructive transfers will subject you to prosecution for bankruptcy fraud.
Elements of Constructive Transfers
Constructive fraudulent transfers have two elements:
- In exchange for the transfer, the debtor received less than “reasonably equivalent value;” AND
- The debtor is insolvent and can’t pay his debts at the time of the transfer, is left with unreasonably small capital as a result of the transfer or is unable to pay debts as they become due.
Unlike actual fraudulent transfer, intent to defraud or conceal assets does not matter for a constructive fraudulent transfer. Rather, the Courts will look at the transaction to determine if it was valid on both sides. To determine whether the property transfer was of reasonably equivalent value, the Court look at factors such as:
- Whether the sale was for a fair market value;
- Whether the transaction was made in good faith and in the ordinary course of business;
- What was the impact of the transfer on the debtor’s estate.
Filing a False or Fraudulent Bankruptcy Petition
As part of the bankruptcy proceeding, the debtor must truthfully and completely fill out and answer many different forms. Intentionally omitting or providing false information constitutes bankruptcy fraud. Thus, it is important to be honest when filling out paperwork.
Repeated Bankruptcy Filings
Another type of bankruptcy fraud is filing repeated bankruptcy petition. This type of fraudulent conduct is codified in Section 157 of Title 18 of United States Code.
18 U.S.C. 157 states: "A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so— (1)files a petition under title 11, including a fraudulent involuntary petition under section 303 of such title; (2)files a document in a proceeding under title 11; OR (3)makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both.
Individuals who file for serial bankruptcies can be convicted of bankruptcy fraud, when they file them as part of a scheme or artifice to defraud. Examples of serial bankruptcy filings, which may subject the debtor to criminal charges are:
- Filing for bankruptcy protection multiple times;
- Attempting to conceal serial filings by using fake names and social security numbers;
- Filing for bankruptcy protection in different states.
Bribery or Extortion of a Bankruptcy Party
Bribery or extortion of a bankruptcy trustee or another party to the bankruptcy proceeding is considered to be the most egregious type of bankruptcy fraud. As a general rule, debtors cannot provide any financial incentives to any bankruptcy trustee, creditor or anyone else (i.e. property appraiser) in relation to the bankruptcy proceeding. Even if the underlying financial incentive is completely lawful and above board, acting with the requisite criminal intent is enough.
What Other Crimes are Frequently Charged with Federal Bankruptcy Fraud?
Conduct which constitutes Federal Bankruptcy Fraud frequently intercepts with other financial crimes. Specifically, in addition to federal bankruptcy fraud, you may also be charged with:
- Mortgage Fraud;
- Wire Fraud;
- Bank Fraud;
- Aggravated Identity Theft.
Which Agencies Investigate and Prosecute Federal Bankruptcy Fraud?
Several federal agencies have oversight over detection and prosecution of federal bankruptcy fraud. These oversight agencies are:
- U.S. Department of Justice;
- Federal Bureau of Investigation (“FBI);
- Internal Revenue Service (“IRS”); AND
- U.S. Trustees Program.
Can State Prosecutors Prosecute Bankruptcy Fraud?
As bankruptcy is a creature of federal law, state prosecutors have no jurisdiction to prosecute bankruptcy fraud on the state level. However, if there is overlap between federal bankruptcy charges and state criminal law, the state prosecutors will be able to bring state criminal charges that relate to the bankruptcy petition. For example, if an individual files a bankruptcy petition and as part of it, includes a forged deed, the state prosecutor can bring charges for forgery or for criminal possession of forged instrument in the first degree.
What Are the Criminal and Civil Penalties for Bankruptcy Fraud?
Federal bankruptcy fraud is punishable by both criminal and civil charges. The different penalties and explained below.
Civil Penalties for Federal Bankruptcy Fraud
In the event the debtor makes false statements or makes material omissions of fact, the bankruptcy discharge can be revoked. If this false information is discovered within one year of the bankruptcy discharge, it can be revoked retroactively.
Criminal Penalties for Federal Bankruptcy Fraud
Criminally, federal bankruptcy fraud is punishable by up to 5 years in prison and/or a fine of up to $250,000.
What is the Statute of Limitations for Federal Bankruptcy Fraud?
For federal bankruptcy fraud, just like for most federal charges, the statute of limitations is five years. However, 18 U.S.C. § 3284, contains a special statute of limitations that applies to concealment of assets in the bankruptcy proceeding.
Under 18 U.S.C. Section 3284, the statute of limitations does not begin to run until the debt of the debtor has been discharged or the denial of the discharge. Thus, the five year time period does not begin to run since the time of the fraudulent transfer, but rather at the time of the discharge or the denial of the discharge.
Contact Top Rated Federal Bankruptcy Fraud Criminal Defense Attorneys
If you or a loved one have been arrested and charged with federal bankruptcy fraud, you need experienced counsel by your side. Please call us at 212-729-9494 or contact us today to schedule the consultation for your federal bankruptcy fraud case.