Bankruptcy can be an extremely valuable debt-relief option for Americans who are saddled with so much debt, it would take them years, if not decades to dig out. Unfortunately, though, some debtors have been known to abuse bankruptcy in the past. When debtors conceal assets from the bankruptcy courts, lie on their bankruptcy paperwork, or bar creditors from receiving money they’re entitled to, they could be committing bankruptcy fraud, a federal crime.

Chapter 7 and 13 bankruptcies can offer incredible relief to debtors. Chapter 7 bankruptcy for example, can wipe out thousands of credit card debt, medical debt, and personal loans. Chapter 13 on the other hand, can allow some debtors to pay off only “a portion” of their debts over a 3 to 5-year time period.

Exempt and Non-Exempt Assets

In reality, debtors can experience a huge financial relief after filing bankruptcy, but there’s a cost to their creditors. The way these losses are mitigated are by allowing certain creditors to receive a portion of debtors’ property. The property that is available to creditors is part of the debtor’s “bankruptcy estate.”

On the other hand, debtors have what is called “exempt property,” meaning it is exempt or left out from the debtor’s bankruptcy estate. Exempt assets cannot be liquidated to pay off creditors because debtors need them to pay their basic bills and maintain their households.

If the debtor has excess property, it may belong to the bankruptcy estate and be subject to liquidation to reimburse creditors. However, many Chapter 7s are “no asset cases” because the debtor does not have non-exempt assets to pay off creditors.

Fraudulent Acts in Bankruptcy

Most bankruptcy debtors are honest people, but there are those who knowingly and intentionally try to deceive the trustee and the bankruptcy court. Usually, this happens when people try to hide property so it can’t be used to pay off creditors, but it can also involve lying in the bankruptcy papers to wrongfully qualify for bankruptcy.

Related: Chapter 7 vs. Chapter 13 Bankruptcy

Examples of bankruptcy fraud:

  • Intentionally not listing an asset on a bankruptcy schedule so it can’t be sold to pay off creditors.
  • Transferring property before filing for bankruptcy to hide it from the court.
  • Concealing the transfer of property from the court.
  • Giving the bankruptcy trustee or court a fake document.
  • Destroying documents.
  • Hiding documents from the court.
  • Lying to the bankruptcy court.
  • Lying during the 341 meeting of creditors.
  • Paying a friend or family member to hide property from the bankruptcy court.

If someone engages in bankruptcy fraud, they can face serious federal charges and penalties. For instance, making a false statement in connection with a bankruptcy case is punishable by a hefty fine and by a term in federal prison. To learn more about bankruptcy fraud, click here.

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