Falsely Pleading Poverty: A Look at Bankruptcy Fraud

Bankruptcy fraud is a white-collar crime that can take on many forms. It can be used as a means to conceal assets to avoid having to forfeit them. In bankruptcy fraud schemes some people intentionally file incomplete or false forms or file multiple times in several states using false or legitimate information. Most bankruptcy frauds involve the concealment of assets. In some cases, individuals might transfer their unrevealed assets to family or friends to keep the assets from being located.

Misty Carter, CFE, CIA                    
Research Specialist, ACFE

The U.S. Department of Justice reports that one in every ten bankruptcy filings has an element of fraud associated with it. For example, in 2009, Joe and Teresa Guidice, famous for starring in the reality show “Real Housewives of New Jersey,” filed for bankruptcy claiming that they were in debt for approximately $11 million. The bankruptcy led to federal charges held against them which led to them being charged with a 39-count indictment for hiding assets. The Guidices failed to disclose information related to their businesses, rental properties and Teresa’s salary for the “Real Housewives” franchise. Teresa was ultimately sentenced to 15 months in a federal prison while her husband Joe was sentenced to 41 months. In another case, Steven Zinnel, was sentenced to 212 months in prison and fined $500,000 for bankruptcy fraud. Zinnel hid assets using a shell company he had invested in as a silent partner. The company paid distributions to Zinnel for many years, but he never disclosed the shell company or the payments he received. He kept this scheme going until he was caught by bankruptcy officials. These and many more cases are examples that show how bankruptcy fraud can be committed.

What is bankruptcy?

Bankruptcy occurs when an individual owes money to someone, but does not have the means to pay the debt. The individual’s property is liquidated and divided among creditors to pay the debts. Bankruptcy is supposed to give consumers a new start, assist in reorganizing businesses and equally distribute a debtor’s assets to creditors. It can be a lifesaver for honest people who are overwhelmed by debt because of unemployment, medical issues, divorce, a disability or any other legitimate reason. However, some people take advantage of this provision and use it as a means to get out of paying their obligations even though they have the financial means to pay their outstanding debt.

What is bankruptcy fraud?

Bankruptcy fraud is a white-collar crime that can take on many forms. It can be used as a means to conceal assets to avoid having to forfeit them. In bankruptcy fraud schemes some people intentionally file incomplete or false forms or file multiple times in several states using false or legitimate information. Most bankruptcy frauds involve the concealment of assets. In some cases, individuals might transfer their unrevealed assets to family or friends to keep the assets from being located.  

Petition mills are a type of bankruptcy fraud scheme that is on the rise in the United States. In a petition mill scheme, an individual pretends to be a financial advisor of a consulting firm and promises to make a financially-strapped person’s debt problems go away. The victims believe that they are receiving help in avoiding bankruptcy, while the fraudulent consulting firm is charging them significant amounts of money for their “consulting” services, usually emptying any savings they might have and then disappearing.

Who investigates bankruptcy fraud?

Fortunately, many groups are on the lookout for bankruptcy fraud. The FBI is the primary investigative unit responsible for investigating bankruptcy fraud under the jurisdiction of the U.S. Department of Justice (DOJ). When the DOJ uncovers suspected fraud, they refer the information to the U.S. Attorney General and the FBI. These two offices jointly open a case if necessary and start conducting interviews and reviewing financial documents. Depending on the complexity of the case, they might use undercover operations or electronic surveillance to get additional evidence. Their investigations are not limited to a single group of people. Investigations can be conducted on private citizens, business owners, CEOs of corporations, real estate agents, bankruptcy attorneys, and bankruptcy petition preparers. The FBI might also partner with other federal agencies, such as the IRS, to investigate bankruptcy fraud. In 2013, the IRS opened 28 investigations related to bankruptcy fraud, and of these investigations, 12 people were sentenced. Bankruptcy fraud is a felony and carries a sentence of up to five years in prison and/or a fine up to $250,000. In addition to the IRS, there are more than ninety bankruptcy fraud groups and specialized task forces that work with the DOJ to help combat bankruptcy fraud and other criminal activity that comes along with it.

How to report suspected bankruptcy fraud

To report suspected bankruptcy fraud, prepare a written statement that includes the following information:

• Name and address of the person being reported
• Any identifying information regarding the individual
• A description of the alleged fraud, including how and when the fraud took place
• A list of all assets that were concealed and its estimated dollar value
• The informant’s name, address, and telephone number

This information can be sent to:  USTP.Bankruptcy.Fraud@usdoj.gov 

Bankruptcy fraud is widespread in the United States and is perpetrated by a variety of individuals who can be a part of any group or class. CFEs should be aware of the various schemes related to bankruptcy and ensure they are equipped with the proper knowledge so that they report any suspicious activity related to bankruptcy to the appropriate authorities.