One Common Way People Unintentionally Commit Bankruptcy Fraud

In many respects, filing for bankruptcy is a straightforward process. You file the petition, attend all required meetings, and wait for the discharge to go through. However, there are a lot of rules that must be followed to protect all parties involved in the proceedings, and a person can unintentionally commit bankruptcy fraud if they're not careful. Here's one common way this happens and how you can avoid it.

Transferring Assets Prior to Filing

Concealment of assets is one of the biggest problems the courts have with petitioners, accounting for almost 70 percent of bankruptcy fraud. In an effort to avoid losing assets they want to keep, some people will employ a variety of techniques to hide money and property. One common method is to transfer ownership of assets to friends or family members who will hold them until the bankruptcy case concludes, after which the other parties return the assets to the original owner.

Although it may not have been your intention to commit fraud when you sold or gave away your property, you could be accused of doing so if the circumstances of the transfer raise red flags. Here are some things trustees look for when auditing asset transfers:

  • Whether the asset was exempt or non-exempt; exempt assets are not used to pay creditors, so the court doesn't care all that much what you do with them
  • Whether the asset was sold or given away
  • Whether the asset was sold for fair value; asset sold at significantly less than their market value may indicate the person is attempting to use bankruptcy exemptions to avoid turning the proceed over to the court
  • Who the property was transferred to; people close to the debtor are often given closer scrutiny than strangers
  • When the transfer occurred; transfer conducted close to the bankruptcy filing date tend to be eye more suspiciously than transfers that occurred years ago

When you file for bankruptcy, the trustee in the case will audit your asset transfers for up to the 4 years prior to you filing for. If a transaction seems fraudulent, he or she may require the recipient of the asset to turn it over to the court, and all parties involved may be hit with fines, jail time, or other consequences.

Avoiding the Charge of Fraud

There's nothing wrong with selling or giving away assets you own prior to filing for bankruptcy. However, there's a right way to go about it that will help you avoid making a mistake that could land you in trouble. First, avoid giving away non-exempt items. Non-exempt assets are placed in your bankruptcy estate, liquidated, and the proceeds used to pay your creditors. Giving assets away may make the trustee think you're trying to hide them, especially if the assets go to people in your close social circle.

Second, sell the assets for fair market value. As noted previously, selling an item for significantly less than it's worth can raise red flags and make the trustee think you're trying to avoid handing over the proceeds of the sale to the court. Be sure to have the asset appraised by an expert to ensure you're not unintentionally underselling it.

For more information about this issue or help dealing with asset transfer concerns, contact a bankruptcy attorney like D Derk Demaree Attorney at Law.