Debtor fraud is the most common type of bankruptcy fraud. The system is used to allow the debtor to conceal and transfer assets from his creditors/victims and to receive a bankruptcy discharge of his pre-petition debts.
The concealment of assets and related false statements constitute over 70 percent of all bankruptcy crimes, according to the latest FBI statistics. A debtor who fails to list assets on his/her bankruptcy schedules commits both the crime of concealment and false statement. By concealing assets, the debtor attempts to preserve property for future use and to deprive creditors of their fair share of assets. Concealment may take the form of omission of assets in their entirety or the gross undervaluation of assets.
Failure to Schedule Assets: Typical examples include P.I. lawsuits, real estate, bank and investment accounts, stocks, jewelry, art work and interest in non-debtor entities.
Undervalued Assets: Assets are listed, but their value is grossly understated or deemed worthless. The intent is to persuade the trustee and creditors not to liquidate the assets.
Transfer of Assets Pre-petition: The debtor transfers assets with little or no consideration to third parties with the agreement that after the case is closed the property will be returned to the debtor. The relationship to the debtor or the agreement with the transferee is not disclosed.
Transfer of Assets Post-petition: Debtor sells or transfers assets without court approval. If the debtor does seek court approval, the debtor does not disclose his relationship to or agreements with the purchaser. For example, the debtor sells the property below its value to a straw buyer who agrees to convey it back to him. A similar situation occurs when the purchaser agrees to give the debtor part of the purchase price “under” the table and court approval is sought for the purchase at a lower price to allow for the transfer.
· Claims of theft or large gambling loss just before bankruptcy
· Inability to account for property listed on insurance policies or personal financial statements in existence before bankruptcy
· Incomplete schedules–frequent amendments in response to creditor questions
· Unexplained change in financial circumstances
· Debtor shows no ownership interest in residence
· Tax returns not filed for the relevant years
· Debtor “confused” about his assets and financial affairs
· Unsecured debt does not reconcile with assets listed, e.g., large number of medical bills, but no lawsuit listed
· Failure to list prior bankruptcies
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