How to Avoid Bankruptcy Fraud

bankruptcy fraud

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There are a number of actions a debtor can take leading up to the decision to file for bankruptcy that can be questioned as fraudulent by the bankruptcy trustee. In fact, federal bankruptcy law presumes a debtor has committed fraud if certain purchases or cash advances are made immediately before filing for bankruptcy protection. The key to avoiding bankruptcy fraud is present a full and accurate financial picture to an experienced bankruptcy attorney who knows what will catch the eye of a bankruptcy trustee.

Bankruptcy Trustee and Fraud

In a personal bankruptcy filing, the trustee oversees the case and represents the unsecured creditors. As part of the duties in a personal bankruptcy, the trustee scrutinizes the assets, income, exemptions and other information filed by the debtor. The trustee has broad powers to cancel any contracts or agreements that were designed to hide assets from creditors. The trustee also has the power to throw out the entire bankruptcy filing if it is determined the debtor was in bad faith. Avoid any actions that could be assumed as fraudulent by meeting with a bankruptcy attorney well in advance of the bankruptcy filing.

What Can Be Considered Fraud in Bankruptcy Filings?

Fraudulent Contracts and Agreements

If a debtor tries to sell or give away property to avoid those assets being seized during bankruptcy, the trustee has the power to undo that contract or agreement. Under federal bankruptcy laws, any non-exempt property owned by a debtor must be sold and divided up among creditors. Attempting to dispose of that property before the bankruptcy is presumed to be fraud.

For example, a trustee who notices a land transaction has the authority to seek additional details. If the debtor transferred a piece of property to a family member in the months leading up to a bankruptcy, the trustee can still seize and sell that property and divide the proceeds among the creditors in the case.

Fraudulent Spending Before Bankruptcy

In a personal bankruptcy case, all non-exempt assets, including cash, are seized by the trustee to eventually be divided among the creditors. Debtors are not allowed to spend or conceal cash so that it cannot be given to creditors. That means credit card purchases totaling $600 or more within 90 days of the bankruptcy filing will be presumed to be fraudulent, under federal bankruptcy laws.

In addition, a cash advance of more than $875 within 70 days of the bankruptcy filing will also be presumed fraudulent. If the creditor involved files an adversary claim questioning a purchase or cash advance, the trustee can remove that amount from the bankruptcy. By consulting with a bankruptcy attorney, a debtor should be able to avoid including any potentially fraudulent information in the bankruptcy petition.

Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.


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