What is a Bankruptcy Crime, and Are You in Danger of Committing One?

What do you need to be worry about and what you do NOT need to worry about “bankruptcy crimes”?

This is the last in a series of three blogs about crimes and bankruptcy. The first blog was about how bankruptcy can help deal with one of the potential consequences of a criminal accusation against you, specifically to fight false or exaggerated claims by alleged victims. The second blog was about using bankruptcy as a way to help deal both with the legal costs of defending criminal charges and with a criminal conviction’s financial impact. Today’s blog is about potential crimes arising out of the bankruptcy process itself. You definitely want to avoid being accused of a bankruptcy crime, and this blog can help.

So What IS a Bankruptcy Crime?

The following four kinds of behavior are the most common bankruptcy crimes:

1) intentionally concealing assets from a bankruptcy trustee or other agent of the bankruptcy court;

2) making a false oath related to a bankruptcy case;

3) making a false declaration  or statement under penalty of perjury in a bankruptcy case; and

4) devising a scheme to defraud by:

(1) filing a fraudulent bankruptcy petition,
(2) filing any other document in a bankruptcy proceeding, or
(3) making a false or fraudulent representation, claim, or promise related to a real or false bankruptcy proceeding, at any time before or after the filing of the petition.

So a bankruptcy crime usually consists of hiding assets during a bankruptcy case, lying under penalty of perjury during such a case, or using bankruptcy as a means to defraud.

Very Few Bankruptcy Crimes Are Prosecuted

It’s important to realize that very, very few people who file bankruptcy are prosecuted for a bankruptcy crime. During the 2012 fiscal year, about one case per thousand was referred by the U.S. Trustee’s office to United States Attorneys for prosecution (and had not been declined for prosecution within about 100 days after the end of that fiscal year).

This information is from the U. S. Trustee office’s annual report to Congress for the 2012 fiscal year. This report says that throughout the country this office referred 2,120 cases to U.S. Attorneys for potential prosecution, out of nearly 1.3 million bankruptcies filed during that period (Oct. 1, 2011 to Sept. 30, 2012). Of those 2,120 cases, as of January 10, 2013 the U.S. Attorneys had already decided not to prosecute more than a third of them. So less than 1,400 cases continued to be investigated and could still be prosecuted, although some of those likely would not be. So that’s barely one still-pending case per thousand bankruptcies, or about 0.1%.

But Lots More Bankruptcy Crimes May Be Happening

One out of a thousand cases sound like pretty low numbers, but before getting too relaxed about this there’s strong indication that many, many more bankruptcy crimes are committed but simply not being prosecuted.

By law the U.S. Trustee’s office commissions an independent audit of a sampling of individual Chapter 7 and Chapter 13 bankruptcy cases throughout the country. The audit for the same 2012 fiscal year covered by the report on criminal referrals discussed above revealed an average “material misstatement rate of 25 percent”! That’s in huge contrast to the 0.1 percent rate referred to above.

Admittedly this is a bit of an apples-and-oranges comparison—each using quite different sets of statistics. According to the report on the audit:

The purpose of the audit is to determine the accuracy, veracity, and completeness of petitions, schedules, and other information required to be provided by the debtor…. The audits are designed to provide baseline data to gauge the magnitude of fraud, abuse, and error in the bankruptcy system; to assist the USTP in identifying cases of fraud, abuse, and error; and to enhance deterrence.

An audit consists of a comparison between selected items on a debtor’s originally filed bankruptcy papers and documents produced by the debtor at the request of the audit firm. Audit firms also conduct at least two searches using commercially and publicly available database services to look for unreported assets and to verify the market value of assets.

These audits are looking for “material misstatements,” but all “material misstatements” do not amount to bankruptcy crimes. They often happen without the fraudulent intent required to make them a crime. With all the detailed information required on bankruptcy documents, there’s lots of opportunity to make honest and minor mistakes.

Regardless, the discrepancy between this 25% and the earlier 0.1% does suggest that there may well be a lot of bankruptcy crimes flying under the radar which the U.S. Trustee and U.S. Attorneys simply do not have the resources to uncover and pursue.

Conclusion

So, even if you don’t hear much about bankruptcy crimes and they are prosecuted very selectively, you should still take care to avoid engaging in any. If by nothing else, be motivated by their punishment: up to five years in prison and a maximum fine of $250,000 for individuals and $500,000 for corporations.

Don’t be concerned if you are being honest because most honest mistakes can be overcome by a reasonable explanation and correcting or clarifying your bankruptcy documents. Absolutely avoid intentionally hiding assets, misstating their value, misleading creditors, or transferring property before bankruptcy. Always be completely truthful throughout your bankruptcy proceeding. And be candid with your attorney, who can reassure you when you don’t have anything to worry about and is there to protect you if you do. 

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