The bankruptcy system provides a platform for individuals and businesses to reorganize their financial affairs, offering a fresh start through either restructuring or equitable distribution of assets among creditors. While the system relies on debtors’ transparent disclosure, instances of fraud, involving tactics such as concealing assets or making false statements, can compromise its integrity. This article aims to shed some light on some of the more common bankruptcy frauds.
Common Fraud Schemes in Business and Individual Bankruptcies:
Bustouts / Pre-Planned Bankruptcy: A bustout, a deceptive bankruptcy strategy, involves orchestrated actions where a seemingly legitimate business accumulates substantial inventory on credit, sells it for cash through legitimate or illicit channels, and abruptly shuts down, leaving suppliers unpaid.
Bleedouts: In contrast to bustouts, bleedouts involve a gradual depletion of assets over an extended period, typically orchestrated by insiders. This deceptive scheme often includes concealed assets and false statements, making it distinct from more rapid bankruptcy strategies.
Ponzi Schemes (Investor Fraud): Ponzi schemes promise high returns on investments, luring early investors to encourage others. Filing Chapter 11 bankruptcy strategically may prolong the scheme. Recognizing and reaching out to investors is crucial for unveiling the fraudulent activities.
Health Care Fraud: Increasingly prevalent in bankruptcy cases, health care fraud involves filing Chapter 11 to sustain deceptive activities. Examples include bogus health care plans, theft of employee contributions, and sham facilities.
Rent/Equity Skimming: This tactic occurs when an individual acquires properties without intending to meet mortgage obligations, collecting proceeds while delaying foreclosure through repeated bankruptcy filings.
Bankruptcy Fraud By The Debtor: Debtor fraud, constituting over 70% of all bankruptcy crimes, involves concealing assets and making false statements to protect assets and discharge debts. Examples include failure to schedule assets, undervalued assets, and unauthorized transfers.
Collusive Involuntary Bankruptcy: A rise in collusive involuntary bankruptcies, where creditors file cases with the debtor’s approval, is observed. Examples include strategies to benefit from the automatic stay without disclosing debtor information during the involuntary period.
Straw Buyer/Fictitious Bidder: In this scenario, assets are sold to a court-approved buyer, secretly resold for profit according to a prearranged agreement with a third party. False statements may lead to legal actions.
Serial Filers: Individuals exploit the automatic stay by repetitively filing bankruptcy cases to delay eviction, foreclosure, and debt collection. Recognition of patterns involving false information is vital for tackling serial filers effectively.
In the complex landscape of bankruptcy fraud, understanding the diverse schemes and recognizing red flags is imperative for safeguarding the integrity of the system. This blogpost has delved into common fraud tactics, offering insights into detection and prevention. As stakeholders navigate the bankruptcy arena, vigilance, transparency, and a proactive approach are essential to thwart fraudulent activities, ensuring the equitable distribution of assets among creditors.
