Bankruptcy fraud
If an individual or a company has run into financial trouble and need time and help to reorganize their affairs, or if the situation has gone from bad to worse, it is felt that liquidation is the only option available so that non-exempt assets of the debtor can be equitably distributed among the creditors, the bankruptcy fraud system is well equipped to carry out both these tasks. That's why any well-informed person will tell you that bankruptcy should always be viewed as a fresh start.
In any bankruptcy case, the amount of money a creditor receives ranges from 0% in many cases to 100% in a few cases. A bankruptcy case, just like any other case, will take some time to finally get settled and there will be some delay before the creditors get their final payment.
For the bankruptcy system to function in a manner which is fair and equitable to both the debtor and the creditor, it is necessary that a debtor makes full and honest disclosure of the assets and liabilities, because only then the final disposition will be exactly in accordance with the law. Unfortunately, it is not uncommon to find both debtors and creditors playing a few tricks to obtain more than what they are entitled to under the bankruptcy law. Of course, the law has a number of criminal statutes to prevent such fraudulent conduct on the part of debtors and creditors. Still, people do indulge in bankruptcy frauds.
The two most common bankruptcy fraud are concealing assets and making false statements. But these are not the only ones. There are, in fact, a number of bankruptcy fraud related fraud schemes that are pretty complicated and are designed specifically to take advantage of the bankruptcy system.
In this article, we will discuss various such frauds perpetrated by dishonest individuals.
Fraudulent schemes involving bankruptcy.
* If the purpose of setting up a company is to see that it fails, this fraud is called bustout. The operator buys merchandise from the creditors, sells the goods for cash and never makes any effort to pay the suppliers. Another way of carrying out a bustout is to buy an existing company, then obtaining goods on credit but not making any efforts to pay the creditors and selling the goods for cash as quickly as possible. It is not necessary that an individual can carry out such a fraud only of he/she owns a business. An individual can run up a large consumer credit card debt and then file for bankruptcy.
* Similar to a bustout is a bleed out. In a bleed out, it's the long standing owners or corporate raiders who are the usual perpetrators of this fraud. These insiders, over a period of time, completely deplete the assets of an existing company. Before filing bankruptcy, they conceal the remaining assets also and then go on to make false statements about the assets of the company. Thus, in a bleed out, a company is operated for the sole purpose of facilitating its loot by the insiders. The general methodology used in such cases involves keeping the company's business transactions purposefully complex and confusing. Then a Chapter 11 bankruptcy is filed to complete this scheme.
* There is another common investor fraud scheme called pyramid scheme. Here, the investors are promised interest rate on their investment well above the market rate. What makes such schemes all the more attractive is that early investors do get the promised rate of return and recover their investment. Then, they encourage others to invest. But soon this pyramid begins to crumble and investors not only fail to get any interest payment, they also lose their original investment. Then, Chapter 11 bankruptcy is filed to allow debtor to continue this pyramid scheme. In such cases, many investors who have been duped are reluctant to complain but they are excellent witnesses and must be identified and contacted.
* There is even a health care fraud going on. The perpetrators of this health care and welfare fraud establish a bogus insurance plan claiming to provide health care to both individuals and companies at very favorable rates. Of course, there is no intention whatsoever to provide the promised services or pay any claims. The last few years have seen an increase in the number of bankruptcy cases with these problems. The perpetrators of this health care fraud file Chapter 11 case to continue their activities as well as to try and stall investigations of their wrong actions. Chapter 11 allows them to collect premium from their victims by paying on a few very small claims while they stall on the payment of larger claims.
* Moving on to the individual debtor fraud which happens to be the most common type of bankruptcy fraud. The most common methodology employed by a debtor is to conceal assets or try to transfer them from his/her creditors while trying the bankruptcy route to wipe out the pre-petition debts. According to the latest figures provided by the FBI, 70% of all bankruptcy fraud related frauds consist of concealment of the assets by the debtor and related false statements. When a debtor doesn't list a few assets on his/her bankruptcy schedules, it means he/she is committing the crime of concealment as well as making false statement. Concealment doesn't mean only the omission of assets from the list, even a gross undervaluation of the assets is taken as concealment. The debtor indulges in such fraud in the hope that he/she will be able to use this asset for future use and in the process; creditors are deprived of their fair share of assets. This concealment can be done in a number of ways. Debtor may not list some assets such as real estate, bank and investment accounts, stock, jewelry and such items. Or the assets may be listed but they may be so grossly undervalued so as to make them almost worthless.
* Another way of concealment is when a debtor transfer some of the assets to a third party, usually for little or no consideration, through an agreement which says that after the bankruptcy case is closed, the asset will be returned to the debtor.
* Another type of bankruptcy fraud is what is known as a 'fictitious bidder'. In this scheme, the debtor first sells his/her assets to a court-approved buyer. Then these assets are resold, this time secretly, at a profit to a third party which already had such an agreement with the debtor.
* Some individuals, in order to take advantage of the automatic stay on the creditors collection activities such as eviction, foreclosure and similar such measures, that a filing in the bankruptcy court provides, file more than one bankruptcy case. Their petitions usually contain fictitious names or variation of the debtors name and false social security numbers. In some case, Chapter 7 and Chapter 13 cases are filed interchangeable.
Thus, there are quite a few ways through which dishonest individuals try to manipulate the bankruptcy system which has been designed to help both the debtors and the creditors.
However, bankruptcy code provides various checks and balances to see that such frauds are timely detected and their perpetrators swiftly punished.
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