A prospective client called me and started talking about an asset that he (apparently) couldn’t live without. I explained that most people don’t lose anything in a Chapter 7 case, and that an attorney could help him decide how to protect his assets. He didn’t like this answer. He started throwing out hypothetical situations and finally asked how “they” would ever know he had concealed assets from the Court and the trustee. (As an aside, people usually get caught because of the X factor. Ex-spouses, ex-friends, ex-business partners, etc. often report suspected fraudulent activity to the U.S. Trustee Program.)
I told him that he might get away with it, but I wasn’t going to help him. Bankruptcy fraud is a serious matter; convictions can lead to fines of up to $250,000 and up to 5 years in federal prison. I told him to think about it like speeding: If you choose to go over the speed limit, be prepared to pay the consequences if you get caught. While you may be willing to risk a $200 traffic fine, are you really willing to risk going to federal prison? He hung up on me and I never heard from him again.
The bankruptcy system demands full disclosure of all your assets, all your debts, and all your sources of income. The people who typically get into trouble (see Mr. Hecker & Mr. Dykstra, above) are the ones who try to hide assets from the Court. While most debtors don’t have multi-million dollar estates, they still want to protect what they have. As I tell my clients, the best way to lose your assets is to try and hide them. Disclosure and exemption of assets is the way to protect them.
Most debtors never have to worry about any of this. If you make an honest mistake in your paperwork, you will usually be given a chance to correct it. The fraud charges happen when someone knowingly conceals assets in a misguided attempt to protect them. There’s a significant difference between forgetting about your $10 bicycle and forgetting about your $35,000 bank account.
Your bankruptcy attorney can tell you if you have assets that cannot be protected in a Chapter 7 bankruptcy. If that’s the case, a Chapter 13 plan may allow you to keep everything. However you decide to deal with the issue, fraud is not the answer.
For more on this issue, check out this post from the Bankruptcy Law Network.