The Dangers of Bankruptcy Fraud

The recent cases of Denny Hecker & Lenny Dykstra reminded me of a phone conversation I had a little over a year ago.

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.

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  1. I am thinking about filing bankruptcy but would like to discuss this more thoroughly.

    • How do I start the process?

      • Give me a call to set up an appointment to talk. I can answer your questions and present you with options for dealing with your debt issues.

  2. About the filing / ban on preferential payments…I want to pay off what I’ve been charging in the past month on a couple of cards because the balances are small — less than $200 each — and I don’t want to be accused of charging stuff without meaning to pay! Not filed for bankruptcy yet, but I just realized my payments to each card over the last 90 days will add up to more than six hundred or so.
    What to do? We aren’t supposed to use our cards and if we make a mistake and use them before we knew, we can’t pay them? The charges were for day to day expenses like food, gas, telephone.

    • On those facts, I wouldn’t worry about making payments. As long as you honestly intended to pay when you made the charges, you shouldn’t run into any trouble. The fact that the charges were for usual household expenses and not luxuries makes it highly unlikely anyone would object to a discharge on that basis. If you plan to file bankruptcy, stop making the credit card payments. Even more importantly, stop using the cards. Once you’ve made the decision to file, you shouldn’t be using credit cards for any reason.

      If your credit card payments total more than $600 in the 90 days before filing, the trustee may try to recover those funds. It won’t hurt your bankruptcy case; it just has to be disclosed so the trustee can make a decision whether or not to pursue it.

      Of course, be sure to discuss all of this with your bankruptcy attorney. After meeting with you, he/she can give you advice regarding your personal situation. Without sitting down and talking with you, all I can give is general information, not legal advice.

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