Identifying Bankruptcy Fraud Schemes

Bankruptcy fraud is a nonviolent crime normally committed in commercial settings for financial gain. In normal circumstances, a debtor’s bankruptcy consists of full disclosure of acquired assets, timely reporting and honest filing. Bankruptcy fraud usually happens when the debtor already in bankruptcy has malicious intentions to deceive, manipulate or cheat the bankruptcy court.

Bankruptcy fraud can take on many forms; from concealing assets to avoid giving them up, bribing members of the court-appointed trustees, use of false information during filing in a jurisdiction, statutory fraud, filing incomplete or false forms and information on a bankruptcy form. Usually, it is very hard to detect bankruptcy fraud because at the end of it all, the debtor wants to make it appear as a normal bankruptcy case. No statistical analysis or technology system so far has been able to pick up vital inconsistencies because these cases involve different procedures and do not have a numerical comparison to formulate a standard distribution curve which normal fraud cases would deviate.

There are various methods of detecting and identifying bankruptcy fraud among them:

  • Petition Mill Schemes

This type of bankruptcy fraud is currently on the rise in the white-collar world. It is commonly committed by a third party who poses as a financial advisor or a consultant. Several cases usually occur in the real estate sector where they pretend to assist tenants experiencing financial problems from being thrown out of their houses. The fraudsters come in as middlemen, negotiating on behalf of tenants, meanwhile, they are actually filing for bankruptcy in the tenant’s name. What happens next is a drag of proceedings and high fee rates charged to the tenant, who then is left with nothing and a ruined credit score.

  • Looting Schemes

This type of bankruptcy fraud occurs during a sales process where the defaulter’s dying company tries to sell its assets during the pre-petition period to another person without disclosing himself/herself as being a stakeholder in the business transaction. The defaulter claims to have found a buyer interested in acquiring his/her company, while behind the scenes the buyer is actually a mock representation or an agent of the defaulter. Usually, the terms of transactions appear legitimate and are met with contentment by the creditors and not unjustly beneficial to the defaulter. The defaulter’s company then files a bankruptcy petition to liquidate and control any remaining assets.

  • Bust-Out Schemes

This affects companies in connection with distributing consumer goods. In this case, a company is created and builds decent credit to pass out as a reputable company with reputable business. To ensure credibility, the company begins with small transactions but behind the scenes strategizes to make the company seem like it can handle large cash flows and service its debts accordingly. Once the defaulters are satisfied with making a name and building satisfactory credit, they then contact various dealers for large orders for goods with a promise of a payment period (usually 30-90 days). Once they are in receipt of these goods, the company then sells them and takes an unusually long time to repay the creditors. After stalling, the company files for a bankruptcy petition.

  • Bleed Out Schemes

This is often an inside job where top management like managers, directors or officers move little monies or assets meant for the company for their own personal gains. Most of the time, the company may be doing extremely well and is not in financial distress. What happens is, a group of company staffers involve themselves in transactions on behalf of the company and then redirect the business assets in favor of themselves and to the disadvantage of the company. For example, money could be diverted to an underperforming subsidiary owned or controlled by one of the managers that work at the company being milked. The transactions are usually well planned, well documented and well-drawn to prevent any risk of exposure. Sometimes when auditors come in to check company statements and transactions, these documents will not reveal any suspicious business.

Other methods of identifying bankruptcy fraud are pretty basic such as when a defaulter or representative shred documents to cover asset transfers or hide unreported properties. Other cases are interesting for example investor pyramid schemes, cover-ups or when defaulters try to undervalue their assets to gain favor. If caught up in any of the above-mentioned situations, it is important to notify a bankruptcy attorney and be watchful of any suspicious activities so that you can start dealing with the cases at an early stage.

About the Author
This article was brought to you by the business attorney from our law firm who is very skilled in the various aspects of business law and is ready to assist you with whatever you need in your small business.


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