What is Bankruptcy Fraud?

The bankruptcy code is federal law and the bankruptcy courts are federal courts. Given the significant power the bankruptcy process has to remove the otherwise existent rights of creditors to collect otherwise legal debts, there is the potential for serious abuse. As a deterrent, Congress enacted specific criminal statutes to punish certain serious wrongdoing in the bankruptcy process, in chapter 9 of title 18 of the US Code.

While I tend to use the term "bankruptcy fraud" generically to refer to all bankruptcy crimes, bankruptcy fraud is actually a specific crime involving traditional fraud in the context of the bankruptcy system (18 USC § 157). Perhaps a more common bankruptcy crime is that of concealment of assets and false oaths (18 USC § 152). Both are punishable by fines and federal prison sentences.

Officials in the bankruptcy process, including the trustees, judges, and bankruptcy administrators, make referrals of conduct that is suspected as bankruptcy fraud. Ultimately, the Department of Justice and the local US Attorneys make a decision of whether to charge an individual suspected of a bankruptcy crime. In that respect, there is an independent review of the possibly wrongdoing, subject to all criminal due process rights.

Inside the bankruptcy process, there other consequences to misdeeds such as concealment of assets. Denial of discharge is one serious consequence, and deprives the debtor of the primary benefit sought in a bankruptcy proceeding. Similarly is revocation of confirmation of a bankruptcy plan. These matters are handled within the bankruptcy court as a civil matter.

Note that bankruptcy fraud is different than fraud allegations related to a debt. The allegation that a debtor defrauded a creditor is a civil matter, not a criminal matter, and is handled largely through the mechanism of dischargeability determinations.

What to Do

If you are considering filing bankruptcy, the most important thing is to be open and honest with your bankruptcy attorney. It is difficult to commit a bankruptcy crime if you are careful to read and review documents to be filed, disclose items diligently, and ask questions about things you don't understand. The vast majority of people filing bankruptcy are honest people who have had unfortunate circumstances and are in a need of fresh start on their finances.

If you are accused of bankruptcy fraud, this is a serious criminal matter in which you should seek the assistance of experienced federal criminal legal counsel. Our office does not handle such matters.

If you suspect bankruptcy fraud has occurred in a bankruptcy case, you should contact the bankruptcy administrator for the district in North Carolina where the case is or was pending.

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