April 13, 2012

Bankruptcy Fraud

Creditors and Consumers Pay the Price

Bankruptcy Form

Federal bankruptcy proceedings can be a lifesaver for honest individuals overwhelmed by debt as a result of unemployment, a medical crisis, divorce, disability, or any number of other legitimate reasons.

Unfortunately, bankruptcy can also be used by the unscrupulous to get out of paying their debts…even though they may have the financial assets to do so. And often, financial fraudsters use bankruptcy filings to prolong their illegal white-collar schemes—buying time before the game is up for good.

The FBI is the primary investigative agency responsible for addressing bankruptcy fraud. And while there are other financial crimes that require larger investments of our resources—like mortgage, financial institution, and health care fraud—we take our responsibility to pursue allegations of bankruptcy fraud very seriously. We focus on cases with large dollar amounts, the possible involvement of organized crime, and suspects who file in multiple states. Currently, we have nearly 300 pending bankruptcy fraud cases open around the country.

How the process begins. The U.S. Trustees Program, part of the Department of Justice, oversees the bankruptcy system. When it uncovers suspected fraud, it refers the information to the appropriate U.S. attorney and to the FBI. Working closely with the U.S. Attorney’s Office, our field office investigators open a case if warranted and begin conducting interviews and reviewing financial documents. Based on the complexity of the case, we can also use techniques like undercover operations and court-authorized electronic surveillance to gather additional evidence.

The culprits. They typically include private citizens, small business owners, corporate CEOs, real estate agents, politicians, and loan officers. We’ve even seen cases where bankruptcy attorneys and bankruptcy petition preparers have engaged in criminal behavior at the expense of debtors and creditors in bankruptcy proceedings.

Success Stories:
Recent Bankruptcy Fraud Investigations

- In Phoenix, a financial loan officer was sentenced to 15 years in prison and ordered to pay $22 million in restitution after being charged with various bankruptcy and mortgage fraud schemes. Details
- In Newark, a former CEO of a financial company pled guilty to bankruptcy fraud in connection with his personal bankruptcy filing. Details
- In Atlanta, a county official was sentenced for bankruptcy fraud and tax evasion after embezzling more than $120,000 in public funds and of course never reporting the stolen money in her bankruptcy petition or on her taxes. Details
- In Boston, the owner of a manufacturing company pled guilty to bankruptcy fraud after secretly transferring company assets to his new company before declaring bankruptcy. Details
- In Indianapolis, a consumer inserted her name on another person’s bankruptcy documents and sent them to a creditor to get out of paying her own debt. Details

The most common types of bankruptcy fraud. The majority of our casework involves people who have lied under oath or provided false documentation during their bankruptcy proceedings, concealed or transferred their financial assets, or committed tax fraud. Other schemes include using false identities to file for bankruptcy multiple times in multiple locations, bribing a bankruptcy trustee, and intentionally running up credit card bills with no intention of paying them off (also known as “credit card bust-outs”).

Our investigations have shown that many times bankruptcy fraud is committed in conjunction with crimes such as credit card fraud, identity theft, mortgage fraud, money laundering, mail and wire fraud, etc.

The FBI often partners with other federal agencies—like the Internal Revenue Service—to investigate bankruptcy fraud. We also participate in many of the 70-plus bankruptcy fraud/mortgage fraud working groups and specialized task forces around the country…with U.S. Trustee Program representatives, U.S. attorneys, and other federal partners.

Bankruptcy fraud not only affects creditors like businesses and financial institutions who lose money from fraud, it also results in higher credit card and loan fees and often higher taxes…for everyone. So if you suspect bankruptcy fraud, please contact the U.S. Trustees Program at USTP.Bankruptcy.Fraud@usdoj.gov or your local FBI office.

If you are considering filing for bankruptcy for legitimate reasons, contact an attorney who specializes in bankruptcies—and do your due diligence before hiring a lawyer by getting referrals from someone you know who has declared bankruptcy, checking with your local bankruptcy court, contacting your state bar association, etc.

- More on financial crime