Bankruptcy Questions Answered

Bankruptcy Contempt Case Highlights Important Rules

A recent news article from LoanSafe.org tells the story of a woman who broke some important bankruptcy laws and ended up with almost $48,000 in fines to pay, on top of a five-year probation period. If that doesn’t sound like a good deal to you, read on to find out what she did wrong.

According to sources, the woman’s case worked like this:

• In 2005, the woman in question filed for Chapter 7 bankruptcy. Chapter 7 is designed to help filers eliminate certain unsecured debts without making creditor payments through a repayment plan (that only comes into play in Chapter 13 bankruptcy).
• As bankruptcy law requires, the woman testified to the completeness and accuracy of the information in her bankruptcy petitions as part of the Chapter 7 process.
• Before filing her bankruptcy petition, the woman apparently transferred a piece of property (worth more than $47,000) to her son. She did not mention this transfer in her bankruptcy documents.
• After the Chapter 7 case ended, the woman reportedly sold the “transferred” property and used the money to buy a home in a different state without reporting the proceeds of the sale.

Avoiding Bankruptcy Fraud

The woman’s crime was that she improperly transferred property with the intention of shielding it from the bankruptcy court. Had she proceeded lawfully without transferring the property, it would have been considered part of the bankruptcy estate.

Depending on the specifics of the woman’s case, the property might have been sold to raise money to repay her creditors in part; however, lying about the property ended up costing her in the long run.

One reason most insiders recommend that potential bankruptcy filers work with a bankruptcy lawyer is to help them avoid bankruptcy fraud, which includes all of the following.

• Reporting incorrect or incomplete information: While the bankruptcy court may excuse honest mistakes on paperwork, more serious “mistakes” will likely lead to some legal action.
• Attempting to repay a favored creditor before filing: Singling out one creditor (say, a family member or friend who lent you money) to repay before discharging other debts in bankruptcy is not allowed. Those who attempt to do so could face charges of bankruptcy fraud.
• Improperly concealing or transferring property: This could be considered a branch of the “complete and accurate” rule, but it deserves its own section. Attempting to hide or pretending to give away assets to shield them from bankruptcy is not permitted.
• Omitting known future income: Whether you’re expecting a tax refund or a hefty inheritance, it’s important to include it in bankruptcy petitions. Otherwise, you risk being charged with bankruptcy fraud.

As the story above illustrates, bankruptcy fraud is serious business: fines can get as high as $500,000 and those convicted may face jail time. Neither of those options sounds like a good way to get back on your feet financially.

Posted in Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Legal Info, bankruptcy fraud, homes in bankruptcy | Comments Off

Bankruptcy Fraud: Don’t Cross that Line!

The Associated Press reports that former baseball star Lenny "Nails" Dykstra has been charged with bankruptcy fraud by a California based United States Attorney.  Dykstra filed for Chapter 7 bankruptcy in 2009, scheduling $31 million in debts and only $50,000 in assets.

In the complaint, prosecutors allege that Dykstra sold or destroyed over $400,000 worth of property.  Among the property that Dykstra allegedly sold – presumably to raise case – were sports memorabilia and furnishings from the home he lost in the bankruptcy.

Obviously most of the Chapter 7 cases filed in the Northern District of Georgia, or in most bankruptcy courts do not involve millions of dollars of debts incurred by a high profile debtor.  However, there is an important lesson that all bankruptcy filers can learn from the charges levied against Mr. Dykstra.

When you list assets on your bankruptcy petition, you are swearing that this list is accurate under penalty of perjury.  If your trustee discovers that items have been omitted, or worse, that they have been secretly sold, the trustee will refer the case to the U.S. Attorney for prosecution.

Sometimes, I overhear conversations in bankruptcy court in which a debtor expresses frustration with the bankruptcy process or anger at an ex-wife, a former business partner or even a former employer.  I also hear conversations expressing frustration with the rather stingy dollar limits set out in the Georgia exemption statute.   I sense that some bankruptcy filers believe that the circumstances that led to their having to file were unfair and out of their control and as such leaving out inherited jewelry that "no one will ever know about" or selling a few items for cash can be rationalized.

While it is probably true that Chapter 7 trustees generally do not have the resources to thoroughly investigate every Chapter 7 debtor, I caution any bankruptcy filer not to take the risk.

First and foremost, an intentional failure to disclose assets is illegal and constitutes a crime under federal law.  No asset is worth your freedom or personal integrity.

Second, you have no way of knowing if the United States trustee will select your case for a random review which can also mean much more intrusive scrutiny.

Third, it is possible that a third party – often an ex-wife or ex-business partner – might anonymously write the U.S. Trustee to report intentional errors on your petition.

Fourth, you might fall victim to "Murphy's law" – your trustee or someone from his office might see you walk into a pawn shop or might see your auction on eBay.   Believe it or not, these types of coincidences do happen.

Often, issues associated with assets that you cannot protect can be resolved if you do not have to file right away.   While the bankruptcy laws can be unforgiving, they will not punish you if you sell assets to raise money for food, shelter and clothing, as long as those sales are disclosed when applicable.  This is why I advise anyone who is even remotely considering bankruptcy to speak with a bankruptcy lawyer at the earliest possible date.  In my office, I regularly maintain files in "pre-bankruptcy" status for four, six, eight months or longer.  Often the delay arises from my client's need to gain lawful benefit from assets that would be seized if the case was filed early.

Posted in Bankruptcy, Chapter 7 issues, Denial of discharge - Section 727, Fraud, Fraudulent Transfers, General consumer bankruptcy info, Lenny Dykstra, a, allegedly, and, attorney  , bankruptcy fraud, baseball, based, california, charged, conversations, dykstra, examples of prosecution for bankruptcy fraud, expressing, filed, frustration, furnishings, hear, lenny, memorabilia, nails, sold, sports, star, states, united | Comments Off

Real Housewife Star Teresa Guidice Faces Allegations of Bankruptcy Fraud

United Press and about two dozen tabloid web sites and blogs are reporting that reality TV star Teresa Guidice, and her husband Joe have been sued by their Chapter 7 trustee for failing to report assets in their bankruptcy petition.  Guidice, one of the "Real Housewives of New Jersey," apparently signed a book contract for a cookbook that will pay her $250,000 but failed to reveal that asset on her petition.  The trustee also alleges that the tax returns submitted by Teresa and her husband were fraudulent as well.

Setting aside the question of why a book publisher thinks it can make back a quarter of a million dollars on sales of  Teresa Guidice's "Skinny Italian" cookbook, what Teresa and her husband are facing is a complaint under Section 727(a)(4) of the Bankruptcy Code, which bars a Chapter 7 discharge to a debtor who knowingly and fraudulently, in or in connection with the case—

Posted in 727, Chapter 7 issues, Debtors, Denial of discharge - Section 727, Sales, a, acted, and, apparently, arising, bankruptcy fraud, book, case criminal, complaints, contemplate, contract, cookbook, denial of discharge, discharge, fraudulently, guidice, jersey, of , penalty  , prosecution, real housewives of new jersey, section 727, severe, signed, star, teresa, teresa guidice, terminate, the, them section | Comments Off

Examples of Bankruptcy Fraud

Last October, I wrote a post on this blog about bankruptcy fraud, and pointed out that everything included in a bankruptcy filing is subject to scrutiny by the office of the United States Trustee, which is an arm of the United States Department of Justice.  In other words, false statements on a bankruptcy petition could land a debtor in hot water – dismissal of the bankruptcy case, fines and even prison.

Because the bankruptcy process can seem informal, it can be easy to forget that a Chapter 7 or Chapter 13 filing is made up of documents filed in a federal district court and subject to investigation by the F.B.I.

Attorney Gini Nelson, a New Mexico bankruptcy lawyer, recently published a post about bankruptcy fraud in the Bankruptcy Law Network blog.  Gini's post includes a link to the IRS.gov site containing examples of bankruptcy fraud investigations.   I found the IRS.gov link especially interesting in that one can get a sense of the type of fraud that bankruptcy debtors have attempted and the level of fraudulent activity that generated prosecution.  Given the highly interconnected and electronic public record access that is available to bankruptcy trustees as well as government investigators I can't believe any of these folks believed that they would not be caught.

Posted in Bankruptcy, Blog, Chapter 13 issues, Chapter 7 issues, Debtors, Fraud, Fraudulent Transfers, access, and, bankruptcy and perjury, bankruptcy fraud, department, easy, electronic, examples, examples of prosecution for bankruptcy fraud, f b i attorney, gini, highly, informal, interconnected, investigation, investigations   , nelson, public, record, states, the, united | Comments Off

Failure to Disclose Assets Lands Chapter 7 Debtor in Prison

Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts.  This particular debtor used Chapter 7 to discharge over $1 million in liabilities.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor's case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a "poison pen" letter to the trustee will allegations about improper activities by a bankruptcy debtor.

Second, be aware that Chapter 7 trustees and the U.S. trustee like to pursue fraud cases periodically to send a message to debtors and debtors' lawyers that the trustees are paying attention.   Bankruptcy lawyers may be tempted to say "don't worry about it," to avoid extra expense and complication but playing fast and loose with disclosure rules can create major problems for both debtors and their lawyers.

Occasionally I meet with a client who may say something like "between you and me, no one knows this but…."    This type of statement is the last thing that any bankruptcy lawyer wants to hear.  From my perspective that client is really saying "I am thinking about committing a federal crime and I want you to help me."  My license to practice law is not worth the fee for any one case and I have and will continue to decline representation for any client who wants to use my office to file inaccurate schedules.

Nobody likes to surrender assets, especially in a bankruptcy case that may have come about because of factors beyond one's control (such as a layoff, unfair treatment by a lender, a lawsuit judgment that you did not know about).   In most bankruptcy cases you will not lose in assets.   However, losing a few hundred or thousands of dollars is a far better fate than federal prison.

Posted in 84, Chapter 13 issues, Chapter 7 issues, Debtor, Discharge issues, Fraud, Fraudulent Transfers, General consumer bankruptcy info, Insurance, Trustee, a, an, and, assets in, assets nbsp, bankruptcy crime, bankruptcy fraud, cases, committing, crime, disclose, documents nbsp, ended, evidence, failed, failure to disclose assets in bankruptcy, federal, hidden, periodically, prison, programs, provide, pursue, records, texas, the, title, training, trustees | Comments Off

Bankruptcy Fraud Investigations Declining

Between 2003 and 2009, the number of fraud cases investigated by the U.S. Justice Department saw a steep decline—including a 44% drop in bankruptcy fraud cases, according to an article in USA Today.

Bankruptcy fraud, corporate fraud and securities fraud cases all received less attention from Federal prosecutors, according to Justice Department documents, with corporate fraud cases falling 55%, even as our country fell into economic crisis.

And while the number of new fraud cases filed in federal courts has increased over the past few months as investigators struggle to prevent another financial mess, the case load is still lighter than it was at the beginning of the decade.

What is Bankruptcy Fraud?

Bankruptcy fraud is a federal felony offense that may include concealment of assets or debts from the bankruptcy petition. Failure to include an asset when filing bankruptcy is one of the most forms of bankruptcy fraud, and often includes "giving" a valuable asset, such as a car, to a relative or friend to protect it from liquidation.

If a debtor has transferred or sold any property within two years of filing bankruptcy, such property may be taken by the bankruptcy trustee as an asset.

According to the USA Today article, the Justice Department filed only 82 charges of bankruptcy fraud in the fiscal year ending September 20, 2009—despite nearly 1.5 million bankruptcies being filed in that time.

Posted in Justice Department, Legal Info, asset, bankruptcy fraud | Comments Off

FBI Warns Against Bankruptcy Fraud

My Bankruptcy Law Network colleague Rachel Foley from Kansas City has written a useful article on the Bankruptcy Law Network blog that brings to light a problem that many debtors (and perhaps many debtors' attorneys) don't think about too much – bankruptcy fraud.

In my practice I observe that when they come to meet with me many prospective bankruptcy filers are angry – angry at harassing creditors, angry at their employer for cutting hours or jobs, and angry at some of the rules that apply when one files bankruptcy.   Despite what some in Congress may say, no one wants to file bankruptcy and I have met many very nice, reasonable people who feel that they played by the rules and now they are going to have to start all over at age 40, 50 or older.

The net result of this anger sometimes is a sense of "us against them."  Sometimes this manifests itself in an attitude that the debtor will follow the rules mostly but who is going to harm if they don't reveal a cash payment to a relative or the transfer of an old car to a brother.

As Rachel points out in her fine post, this sort of an attitude can really get you in trouble.

When you sign your name to a bankruptcy petition, you are declaring under oath that the information contained therein is truthful and accurate.  If you leave something out intentionally you may not get caught, but, then again you may.  The  U.S. Trustee and the U.S. Attorney have been known to prosecute debtors to set precedent.

Attorneys give you long questionnaires for a reason.  If you leave something off and it later comes to light, we can turn to your original paperwork to confirm what was disclosed to us.  In this same vein, if you notice a mistake on your petition, advise your lawyer in writing.  Proving a verbal notice is difficult.  Further, given that there is a filing fee to add creditors it is unlikely that any lawyer would file an amendment without payment of a filing fee.

The bankruptcy process is not an enjoyable process, although it can put you on the road to financial recovery.  Don't put the benefit of a bankruptcy discharge or risk criminal prosecution by intentionally leaving relevant information off your bankruptcy petition.

Posted in Bankruptcy Petition, Chapter 13 issues, Chapter 7 issues, bankruptcy fraud, fraudulent transfer, omitted creditors | Comments Off