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Bankruptcy Fraud

For many citizens out there, the option of filing for bankruptcy is something that can weigh very heavily on their minds.

There are clear advantages – bankruptcy can be a very useful last option if someone is in a position where they simply are buried in debt with no conceivable way of satisfying their creditors. It allows for a discharge of debts. However, it is definitely not a decision that most people should take lightly or without much deliberation. Most importantly, it is a course of action availavle to honest citizens who have exhausted most other recourses.

Unfortunately, there are those out there that would take advantage of this option that is often referred to as the equivalent of a financial reboot button. In fact, according to the IRS government website, the United States Bankruptcy Court reported 1.2 million filings (2012) for Bankruptcy Fraud.

Types Of Bankruptcy Fraud

There are 3 main types of activities that are considered bankruptcy fraud, whether they’re perpetrated by or against consumers.

1. Concealment of client’s assets

This is probably the most common type. It occurs when a client or debtor files for bankruptcy but actually omits or conceals assets during the declaration phase of the process. Oftentimes, clients or debtors may attempt to transfer the ownership of said assets to friends & family or even transfer them inconspicuously to accounts abroad. Examples of this have been:

  • United States v. Hughes, 401 F.3d 540 (4th Cir. 2005)
  • United States v. Dennis, 237 F.3d 1295 (11th Cir. 2001)

2. Multiple Filings

This type of bankruptcy fraud occurs when an individual attempts to file in multiple states. In separate jurisdictions, debtors commit fraud by incompletely listing assets in order to avoid their potential liquidation. In many cases, this type of fraudulent filing is done with different names, or aliases, across state lines.

3. Petition Mills

In this type of bankruptcy fraud, impoverished and financially-distressed tenants are targeted by predatory “petition mills” with the ostensible offer of avoiding eviction. The firm then collects the debtor’s data and charges them exorbitant late fees under the false pretenses that they are fighting eviction on the tenant’s behalf. In fact, they are using the personal information of the victim to file for bankruptcy on their behalf, ultimately depleting any savings they may have and severely damaging their credit.

Corporate Bankruptcy Fraud:

Here are a few types of bankruptcy fraud committed by businesses; this is also known as corporate fraud:

Bust Outs

Bust outs are where companies are created with the explicit goal of having them fail.

The owner of the business acquires merchandise from creditors, liquidates said goods (often for cash), and then defaults on the debt owed to suppliers. Bust outs are often done with a pre-existing business currently in good credit standing. This beneficial position is leveraged to acquire goods (never intending to pay for them) and then liquidating those same goods as soon as possible.

Below, we present a couple of examples of bust outs.

Distributors of Goods

In this type of corporate bankruptcy fraud, an entity may operate for a short duration and establish good credit standing with large goods manufacturers.

When orders quickly increase, payments are not satisfied. Techniques are implemented to further stall creditors as well. The acquired goods are then sold to retailers at below cost for cash, and subsequently, a bankruptcy petition is filed.

Schedules filed by the debtor after the filing report then trade debt owed to consumer good manufacturers with inventory unusually low compared to the date that the debt was actually created.

Retail Bust Outs

This is where a merchant rents retail space but fails to pay suppliers or rent, and then files bankruptcy to stop an eviction process and gain additional time to orchestrate illegal operations. These retail stores often are part of distributor bust-outs because they offer outlets for consumer products.

Travel Agency Bust Outs

In this case, a travel agency opens and secures authorization plates from airline agency to write tickets. After paying the first few bills, a large number of tickets (these are often tickets to locations abroad) are written and not paid for. These tickets are then sold for cash in discount sales.

The travel agency may also report the authorization plates stolen and continue the fraud scheme. Authorization plates and blank ticket stocks are usually “missing” when the trustee or airline company tries to recover.

In Closing

Bankruptcy is meant to help individuals or businesses to get a “fresh start.” It should go without saying that this legal process should never be abused or used for personal gain. Serious legal penalties are attached to such crimes, and countless fraudsters are caught attempting to file fraudulent bankruptcy claims each year.

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