What is Bankruptcy Fraud?

Posted by Terry Goddard | Jul 30, 2014 | 0 Comments

Seems like a very straight forward and easy question.  It is also a question most bankruptcy clients will never have to worry about.  However, this question addresses more than what we typically refer to as fraud, or more generally, the intent to deceive the bankruptcy court and the process.

Recently, the tabloid news, and mainstream media for that matter, was captivated by the plight of Real Housewives of New Jersey “stars” Giuseppe (“Joe”) and Teresa Giudice.  In March of 2014 the Giudices plead guilty to a variety of fraud related charges regarding loan applications and other financial products.  More importantly, for purposes of this post, they also plead guilty to charges related to misleading and lying to the bankruptcy court regarding their 2009 Chapter 7 bankruptcy filing.  More specifically, they failed to disclose a variety of income sources to the bankruptcy court in that filing.

To be sure, this example is rare.  Most people filing for bankruptcy protection understand and take seriously that their paperwork (the petition and schedules) are signed and submitted under penalty of perjury.  In addition, most people who appear at the Section 341 meeting of creditors understand that they are swearing, under penalty of perjury, to testify truthfully to the assigned trustee.  These appear to all be things missed by the Giudices in their filing.  This is of course an example of overt or intentional fraud.  However, that is not the only type of “fraud” before the bankruptcy court.

The bankruptcy code under section 523 also addresses fraud beyond lying on your bankruptcy paperwork or concealing assets from the trustee.  Under section 523(a)(2) if you commit fraud in obtaining the credit it will not be discharged.  This type of fraud can take many forms.  One form that often comes up is the overpayment of public assistance benefits like food stamps or disability benefits.  If you fail to advise the state or federal agency giving you public assistance benefits that you are no longer eligible for benefits (i.e. you got a job or are earning more income than when you applied) what ever they paid you after that point is an overpayment and you are liable to pay it back.  Generally, in a bankruptcy, you can discharge this overpayment, unless the agency proves you obtained the benefits by fraud.  Whether not telling them of your change in status is fraud is hard to say, but if you lie on your application or conceal a material fact while on the benefit you will probably be guilty of some fraud and the debt will not be discharged.

Another type of “fraud” in bankruptcy is what is called fraudulent transactions.  By way of example, if you go out, just before filing for bankruptcy, and buy a hot tub on your credit card, you will most likely not be able to discharge that debt.  Section 523(a)(2) also exempts from discharge debt incurred on luxury items incurred 90 days before filing when the item is $500.00 or more as well as cash advances taken in an amount $750.00 or more taken within 70 days of filing.

In addition to these types of credit transactions, if you transfer property without getting fair market value for the item the transfer is considered a fraudulent transfer.  In many states you go back 2 years, but in Maryland you actually go back 3 years.  If you have a transaction like this, the Trustee would be able to either have the person you transferred the item to (usually a family member) or you pay back fair market value.  In most cases, any left over exemptions cannot be applied to these transactions as the claim is the estate's claim not an asset of the debtor's.

As you can see, fraud in bankruptcy can take many forms other than what the Giudices were guilty of in their bankruptcy case.  However, it is important to recognize that fraud in bankruptcy is an intent based offense and honest mistakes are a different story.  The key is to be up front with the assigned trustee and the Court.

About the Author

Terry Goddard

Terry L. Goddard Jr. heads the firm's consumer and small business bankruptcy group in both the Baltimore and Southern Maryland offices of Skeen & Kauffman LLP. Terry has over six years of bankruptcy experience assisting clients navigate the complex and intimidating filing for protection under Chapter 7 and Chapter 13 of the bankruptcy code. Terry has been a practicing attorney since 2002.


There are no comments for this post. Be the first and Add your Comment below.

Leave a Comment

Skeen & Kauffman, L.L.P.

With 75 years of combined experience, the law firm of Skeen & Kauffman, L.L.P., is able to offer clients advocacy across a specific range of legal areas. Attorneys Skeen & Kauffman were employed at the same law firm more than 25 years ago, and formed Skeen & Kauffman, L.L.P., in Baltimore, Maryland, in 2004 to meet the needs of clients in a few select areas of law.

Contact Us Today!

The financial stress you are feeling will not get better with time. Take control of your finances again and call Skeen & Kauffman today to speak with an experienced bankruptcy attorney and to schedule your free initial consultation.