Avoiding Bankruptcy Crimes
May 8, 2017
You’re not likely breaking some bankruptcy criminal laws. But if you are or are considering doing so, here’s what they are.
This is the last in a series of three blog posts about crimes and bankruptcy. The first was about using bankruptcy as a way to help deal with the legal costs of defending criminal charges and with the financial impact of a criminal conviction. The second one was how bankruptcy can help you fight false or exaggerated claims by alleged victims. Today’s blog post is about potential crimes within the bankruptcy process itself.
What’s 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 (Section 152(1) of the U.S. Code, Title 18);
2) making a false oath related to a bankruptcy case (Section 157(2), Title 18);
3) making a false declaration or statement under penalty of perjury in a bankruptcy case(Section 152(3) of the U.S. Code, Title 18); 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 bankruptcy proceeding, at any time before or after the filing of the petition. (Section 157 of the U.S. Code, Title 18)
So, a bankruptcy crime usually consists of hiding assets during a bankruptcy case, lying under penalty of perjury during a case, or using bankruptcy as a means to defraud.
Very Few Bankruptcy Crimes Are Prosecuted
It’s helpful to know that very, very few people who file bankruptcy are prosecuted for a bankruptcy crime.
During the 2015 fiscal year, only about 1.5 cases out of every one thousand filed cases were referred by the U.S. Trustee’s office to United States Attorneys for prosecution. (This excludes those referred but dropped from 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 2015 fiscal year. (This is the most recent one available.) This report says that throughout the country this office referred 2,131 cases to U.S. Attorneys for potential prosecution. This is out of more than 860,000 bankruptcies filed during that period (Oct. 1, 2014 to Sept. 30, 2015). Of those 2,131 referrals, as of January 2016 the U.S. Attorneys had decided not to prosecute about 40% of them. 1,276 remained under review. Formal charges had been filed on only 10 of them. With 1,276 under continued review (some of which would likely be dropped), that’s about 1.5 cases per thousand filed.
But Lots More Bankruptcy Crimes May Be Happening
One and a half out of a thousand cases sounds like a quite low number. But before getting too relaxed about this, that may be misleading. There is some strong indication that many, many more bankruptcy crimes are committed but simply not being prosecuted.
The U.S. Trustee’s office commissions an independent audit of individual Chapter 7 and Chapter 13 bankruptcy cases throughout the country. The audit for the 2014 fiscal year revealed an average “material misstatement rate of 23 percent”! That’s nearly one in 4 cases, a huge contrast to the 1.5 per thousand 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. For example, such misstatements likely 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, relatively minor mistakes.
Still, the huge discrepancy between this 23% and the earlier 0.15% does suggest that there may be lots of bankruptcy crimes happening. The U.S. Trustee and U.S. Attorneys simply do not have the resources to find and pursue them.
So, you may not hear much about bankruptcy crimes. They clearly are prosecuted very selectively. But you ought to still take care to avoid engaging in any. If nothing else, be motivated by the potential punishment: up to five years in prison and a maximum fine of $250,000 for individuals and $500,000 for corporations.
But don’t be overly concerned either, if you are being honest. Most honest mistakes can be resolved by a reasonable explanation and by correcting or clarifying your bankruptcy documents. But do absolutely avoid intentionally hiding assets, misstating their value, misleading creditors, or transferring property before bankruptcy. Always be completely truthful throughout your bankruptcy proceeding. And especially be candid with your attorney. He or she can reassure you when you don’t have anything to worry about and protect you if you do.