Avoiding Chapter 7 Bankruptcy Fraud: The Need For Honesty In Financial Disclosures

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Chapter 7 bankruptcy offers vital relief for individuals facing overwhelming debt, but navigating the process requires transparency. In this article, we explore how fraud can occur in bankruptcy filings, the legal consequences of dishonesty, and practical steps to avoid accidental fraud. Keep reading to learn more about how to protect your bankruptcy filing and avoid common pitfalls throughout the entire process.

In this article, you can discover…

• How to better understand bankruptcy fraud and its components.
• Steps you can take to avoid accidentally committing fraud.
• The consequences of leaving assets out of your Chapter 7 bankruptcy petition.

How Is Chapter 7 Bankruptcy Fraud Defined In The State Of California?

Bankruptcy fraud typically falls into two categories. The first involves fraud against creditors, which usually occurs before filing a bankruptcy petition. The second type of fraud happens when a debtor defrauds the court by providing false or incomplete information in their bankruptcy petition.

Fraud Prior To Filing Your Bankruptcy Petition

The first type of fraud can occur in several ways. For instance, you might convince a creditor or lender to extend credit or loan you money by providing false or misleading information. Another form of fraud involves incurring debt with no intention of paying it back.

In other words, if you take on large amounts of new debt just before filing for Chapter 7 bankruptcy, there will be an assumption that you did not intend to repay the debt. Similarly, if you were to incur debts that you have no realistic way of paying off, the question will naturally arise as to how you expected to repay this debt, and, as a result, you may be accused of fraud.

If you find yourself in these pre-petition debt situations, a creditor may challenge the discharge of that debt under a theory of fraud, meaning those debts would not be discharged in bankruptcy, and you would still be liable for paying them back.

When A Bankruptcy Petitioner Defrauds The Courts

The second type of fraud occurs when a debtor lies or omits important information on their bankruptcy petition. This could involve failing to disclose assets, misrepresenting facts, or lying during hearings. If you’re caught committing fraud against the court, your entire bankruptcy discharge can be denied, meaning none of your debts will be wiped out.

In more severe cases, committing fraud during bankruptcy can lead to criminal charges, including perjury, which could result in jail time.

It’s important to be honest and transparent with your attorney and the courts before, during, and after the petitioning process to avoid legal trouble, prosecution, and your bankruptcy case becoming further complicated.

What Are The 70-Day And 90-Day Rules In Chapter 7 Bankruptcy?

The 70-day and 90-day rules in the bankruptcy code refer to 70-day and 90-day windows before you file bankruptcy.

Within a 90-day window, if you should incur more than $650 of new debt to a single creditor, this can be legally identified as fraud, as it will be presumed that you did not intend to repay that debt.

Within a 70-day pre-petition window, if you incur new debt that exceeds $700, this new debt can also be flagged as an attempt to defraud the creditor.

Many clients experience this with credit card debt, so it’s important to be extremely careful with credit card spending in the months before filing your Chapter 7 petition.

Something else to keep in mind: the 90-day and 70-day limits are not set in stone. New debts you incur 92 days or four months prior to filing for bankruptcy can still be looked upon with suspicion and concern by creditors, especially if the debt amounts are high. If you’ve taken on large debts recently, you and your attorney may have to wait to file for bankruptcy to allow this debt to “age” and qualify for discharge.

How Can Recently Incurred Debts Be Safely Aged?

To safely age larger, recent debts, be sure to make regular payments on those debts month by month and allow some time to pass. Don’t assume that debts incurred will simply be discharged if you wait long enough. Rather, be responsible and proactive in making payments and demonstrate to your creditor that you intend to pay these debts back.

Recently, a potential client called me and said he had $35,000 worth of very recent credit card debt. In light of this, he let me know that he planned to postpone filing and rack up another $35,000 of debt to make the bankruptcy “worth his effort.”

Well, needless to say, I did not choose to take that man on as a client, as he was blatantly and casually seeking to defraud his creditors. Don’t commit fraud. Remember, bankruptcy discharge is for the poor, unfortunate debtor and the honest, unfortunate debtor, not for someone who’s hoping to cheat the system.

Can I Hide Or Protect My Assets By Giving Them To Family Or Friends Prior To Filing For Chapter 7 Bankruptcy?

Attempting to protect or hide assets by giving them to friends and family prior to filing is the worst thing you can do for your case. This is known as a fraudulent transfer and will get you into serious legal trouble.

A transfer is fraudulent with respect to a creditor if it’s done with the intent to hinder, delay, or defraud the creditor. Don’t transfer things or move assets around simply because you have creditors or debts.

Secondly, a transfer is described as fraudulent with respect to a creditor if it’s done without getting a reasonably equivalent value in exchange for the transfer. In other words, if you transferred the item instead of exchanging or selling it for a reasonable amount, a creditor or a trustee for your creditors can undo that transfer to the extent necessary to pay off the debt.

How Do Lookback Periods Come Into Play With Transferred Assets?

Lookback periods are set periods of time when creditors and trustees can examine your finances and assets for evidence of fraudulent transfers. For example, a fraudulent transfer made one year prior to filing a bankruptcy petition renders you ineligible for Chapter 7 discharge.

The bankruptcy code also allows trustees to piggyback on non-bankruptcy law statutes. This allows even a four-year lookback period, though this is measured from the day the trustee files a complaint as opposed to the date you file.

And if you have the IRS as a creditor, the trustee can use the IRS’s statute of limitations for a 10-year lookback period. What’s more, the US Trustee’s Office is a division of the US Department of Justice, and one of the investigative tools they have on their side is the FBI. I can safely say, as an attorney, that you will not get away with transferring assets.

Long and short, don’t start transferring assets prior to filing the petition. If you have valuable assets we can’t exempt, you might consider filing a Chapter other than Chapter 7. This can allow you to keep these assets, though you will end up making payments through a plan of reorganization.

When filing for Chapter 7 bankruptcy, false statements can be made either by commission or omission. A statement of commission involves actively providing false information, such as claiming, “No, I haven’t transferred anything,” when you actually have.

For example, one question in the statement of financial affairs asks about asset transfers over the past few years. If you fail to disclose a transfer and the trustee discovers it, you’ve committed perjury, which is a serious offense that could result in jail time.

An act of omission occurs when you leave out important information, such as failing to list all of your assets. Every asset must be included—this means everything from bank accounts and property to smaller items like clothing.

While Chapter 7 bankruptcy helps protect essential items like clothing, you are still required to list everything you own, from what’s in your home to your financial accounts and properties. An attorney can guide you through this process, helping you carefully inventory all of your possessions to ensure everything is properly disclosed.

What Are The Consequences Of Intentionally Leaving Assets Out Of Your Chapter 7 Bankruptcy Petition?

If you intentionally leave assets out of your Chapter 7 bankruptcy petition, one of the most significant consequences is that your discharge can be denied. This means that even after completing the bankruptcy process, you’ll still be responsible for paying off those debts. Worse yet, those debts will remain with you even if you attempt to file for bankruptcy again in the future.

Additionally, you could face severe legal consequences, including jail time and fines. Concealing assets or providing false information in your bankruptcy filing is a serious crime. The penalties for these actions can be steep, and it’s essential to be truthful throughout the entire process.

Once you start lying, it becomes increasingly difficult to keep track of what you’ve fabricated, forcing you to create more lies to maintain consistency. It’s simply not worth the risk. Failing to disclose assets in your bankruptcy petition can lead to severe consequences, so it’s always best to be honest and transparent from the start.

A Case Study From The Field

In one notable case, I worked with a woman who had accumulated tens of thousands of dollars in new debt from a single creditor. After 10 months, she approached me, saying she was ready to file for bankruptcy. I advised her that it was still too soon—her debt wouldn’t likely be discharged, and I warned her of the potential for adversarial proceedings, a type of lawsuit designed to challenge the discharge of certain debts.

Despite my warnings, she insisted on moving forward. As predicted, she soon faced an adversary proceeding – and when she realized how expensive it would be to defend her in that lawsuit, she opted for a less expensive attorney. Unfortunately, they lost the case, and she was left with both attorney fees and all of her original debt still on her shoulders.

This experience reinforced the importance of patience when it comes to managing debt before filing for bankruptcy. While the emotional toll of debt can be overwhelming, it’s crucial to think long-term. Rushing into bankruptcy without proper preparation can leave you worse off than before. Aging debt and waiting until the right time can make all the difference in achieving the fresh start you’re seeking.

Can Bankruptcy Lawyers Advise Clients Across State Lines?

Many people assume that bankruptcy lawyers can offer legal advice nationwide since bankruptcy is governed by federal law. However, lawyers are licensed on a state-by-state basis, and we can only provide legal advice within the states where we’re licensed.

For example, if you’re a Michigan resident considering bankruptcy, I cannot offer you legal advice, as I am licensed in California, not Michigan. Giving advice outside of my licensed state would be practicing law without a license. If you’re not located in California, I recommend checking out my YouTube videos for general insights and consulting with a local attorney to understand how the law applies to your case.

However, if you are in Los Angeles County or Orange County, California, I’d be more than happy to assist you. Feel free to reach out, and we can discuss your situation legally and with the proper guidance.

For more information on Avoiding Chapter 7 Bankruptcy Fraud, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.