What Are The Consequences Of Bankruptcy Fraud?

What Does Discharge Mean?

A discharge is what everybody wants in bankruptcy, that’s the whole point of it. Discharged is the legal term for no longer having a legal obligation to pay a certain debt, it’s the big goal, it’s what you want when you file a bankruptcy. What Debt Is Not Dischargeable? These are called exceptions to discharge, they’re in the bankruptcy code. There are kinds of non-dischargeable debts that we can dive into, domestic support, obligations like child support and spousal support are non-dischargeable, certain taxes are non-dischargeable, especially recent income tax.

Usually,  property settlements from divorce are non-dischargeable, unless you can prove that it doesn’t fall in the category of a domestic support obligation and it would impose an undue hardship, debts that arise from criminal prosecution, debts that arise from driving under the influence, and debts arising from fraud. Those are all examples of non-dischargeable debts in bankruptcy.

What Is Bankruptcy Fraud?

There are a few ways to go at how we define bankruptcy fraud, one of them is if you knowingly conceal assets or make a false oath, or statement, whether it’s orally or in writing, that can be considered bankruptcy fraud. If you obtained credit by using fraud, and in that case, the State will decide what the definition of fraud is, also consider fraud if you’ve been found to have transferred the property to hide your assets when you’re getting ready to file bankruptcy, in that kind of situation your whole discharge could be at risk.

Who Can Tell That You Committed Fraud?

This is when things get interesting in the bankruptcy world, it’s the bankruptcy court, so what will happen in most cases is the trustee or maybe a creditor will file an adversary proceeding in the bankruptcy case. An adversary proceeding is a lawsuit that takes place in bankruptcy court in association with a bankruptcy case. There are arguments when there’s an adversary proceeding, you file the complaint, somebody can answer the complaint, then you’re off to the races. There are arguments on each side and you can defend against this if there’s evidence, there are legal arguments, there are deposition exchanges of documents called discovery, and then if a settlement isn’t reached, it goes to trial just like any other kind of conflict.

What Are The Consequences Of Bankruptcy Fraud?

Bankruptcy fraud is considered a very serious federal crime, you can be sentenced to up to 250,000 dollars in fines, you can get federal prison up to 20 years, or both. Boris Becker filed bankruptcy in England which has very similar bankruptcy laws to our own, and he got two and a half years in prison for bankruptcy fraud. Also, in 2014 Real Housewives Teresa Giudice was sentenced to 15 months in prison, and her husband Joe got 41 months in prison and was facing deportation. She also had to pay 200,000 dollars in fines. 2-3 years ago she filed a lawsuit against her attorney and if she settles and gets some money from that lawsuit, the bankruptcy court from that old case now wants part of that settlement money. In 2019 the bankruptcy court reopened her case hoping to get a piece of that money that would come from her settlement with her former attorney, and then that money would go to her creditors.

What Are The Pitfalls That Could Lead To Bankruptcy Fraud?

The biggest one is not disclosing an asset, and it’s an asset that you have on the day of filing, no matter how small.

Our clients sometimes will say that we are being much too nitpicky or detail-oriented but that’s what you want in a lawyer, is somebody who’s pretty nitpicky and it’s because we’re trying to keep our clients from committing fraud when they sign the documents that say that this is all of their assets. You have to disclose every last thing even if it’s a 3-year-old pair of dirty old tennis shoes, you have to disclose it. This is exactly what Teresa Giudice did, she did not disclose the rental income that she was receiving from a rental property that she had, and she also did not report her accurate income from the TV Show.

Recently, someone here in Texas had received an inheritance, the person gave that inheritance to a family member and then filed bankruptcy. In that situation it’s fraudulent because he transferred assets, he may not have technically owned it on the day of filing bankruptcy that inheritance but he transferred it. There was a client that ran into that situation, we thought he had a very good defense but one of his creditors came to the court and said he obtained this credit by using other people’s names, addresses, credit reports, and those kinds of things.

They filed the adversary proceeding and we were into scheduling depositions, eventually, it went away but that was the accusation that he had. When you fight that kind of accusation you have to dig into what the State considers fraud, even though it’s in federal bankruptcy court we have to look at what Texas considers fraud in general. Then you go with that angle and fight these accusations.

How Transferring Ascites Can Hurt Your Bankruptcy Case?

In some situations you’re only getting a determination of the discharge of debt like with our client where the creditor was saying: he got this loan by fraudulent methods, then, all they were asking for was for that debt, for him to be required to repay that one debt because it was obtained by fraud, it went away but that was their angle. If you get accused of transferring property fraudulently you can be ordered to have no discharge at all, you’re not entitled to your discharge at all because of this property. We had a client who for non-fraudulent purposes had transferred her home into a trust and she did this not quite 2 years before filing bankruptcy. She had special child needs, she was doing some estate planning, she was afraid and she was about to lose her job so she transferred her home into a trust to protect it.

Then, she filed bankruptcy and the trustee has asked for a denial of the discharge saying that she had transferred that house trying to hide it from creditors, so that’s a situation where we would fight that. Boris Becker, the tennis star, got 2.5 years in jail for bankruptcy fraud, and his fraud centered around transferring his money, which you would have to disclose in bankruptcy, to other members of his family in advance of filing bankruptcy, so he wouldn’t have to disclose it in the bankruptcy. That was the fraud that he got charged with.

What Can You Do If Your Petition To Discharge Debt Is Denied?

If that one debt is denied you might make arrangements with the creditor to have some kind of settlement, a payment plan, or something like that. You can also appeal the decision, you can always appeal a bankruptcy decision but usually because it’s so frowned on, there’s not a lot you can do other than just pay that debt. You can convert your case if you’ve done this in  Chapter 7, you can have your case converted to a Chapter 13 where you pay that debt over 3 to 5 years as part of a repayment plan with no interest or penalties.

The U.S. Government Safeguards Against Bankruptcy Fraud

This is what we often tell people who do have a moral opposition to bankruptcy where we stand on that, we talk about how most bankruptcies are filed because of medical debt, and then if somebody comes to us and says: Well, I had a neighbor right down the street who bought a boat and then 3 months later they filed bankruptcy. Here are some safeguards that the courts have put into place, it’s in the bankruptcy code. One of them is the means test. The means test is a calculation of your income before filing bankruptcy, and you can’t get a discharge of all of your debt if you make over a certain amount of money.

It’s a calculation that tells the courts if you make enough money to repay some of your creditors, then that’s what you should do, and you’re required to do that, otherwise, it’s considered an abuse of the system. You cannot discharge debts that were purchased, that are luxury goods and services purchased within 90 days of filing the bankruptcy. Your credit card company will be looking at those statements and determining if that was a luxury good or service, if it is then they’re gonna petition for non-discharge ability.

Also, any cash advances from credit cards or payday loans that were taken out 70 days before filing bankruptcy, that’s non-dischargeable. You also have the creditors and the trustees who are looking out for fraud, that’s what they do, they want these things to be non-dischargeable as much as possible. They will be on the lookout for that and file an adversary proceeding if it does fall into the fraud category.

We, bankruptcy attorneys, have a moral obligation, we cannot file a case if we think that our client is being non-truthful to us, if we think they’re hiding assets we will not file the case, and we will tell them. We’ll withdraw from representation for us, no client is worth risking our law license or our reputation. Finally, if your belongings are of high value and they’re more than what the exemption slate protects for. You’re going to have to liquidate that asset, so the trustee will take it and sell it and give those funds to your creditors.

What Happens If A Lawyer Discovers That Their Client Is Committing Fraud?

In every state there is an ethics line by the state bar, we would tell any bankruptcy lawyer to contact the ethics line. We would immediately disclose it to the trustee in the court and we would probably withdraw from representation at that moment if the client had done something that put our representation in danger. We would withdraw and then we must disclose that fraud to the court and the trustee handling the case but it’s never a bad idea to call the local ethics line. It’s free, it’s confidential and they can give you guidance on what your obligation is. What Happens After A Debt Is Discharged? When a debt is discharged it does stay on your credit as a zero balance. It was discharged in bankruptcy so you don’t owe that debt anymore, it may still show up as having once existed but a discharged debt is a debt that you do not have to pay to walk away from.

What Is It Like After The Bankruptcy Case Is Closed?

When you have your discharge you can move forward, you don’t have as much in the way of financial burden moving forward. You can still buy a car, you can still obtain new credit but hopefully, you have some tools so you keep that credit in check, and you can just go forward with your life with fewer bills that you have to pay. You can keep up your household expenses but everything else gets wiped out, it’s a wonderful, very helpful tool.