Bankruptcy Fraud Under Federal Law – 18 U.S.C. § 157
Bankruptcy fraud is a federal white-collar crime that occurs when someone intentionally abuses the bankruptcy system to deceive creditors, the court, or a bankruptcy trustee.
Under federal law, 18 U.S.C. § 157 makes it illegal to file or use bankruptcy proceedings as part of a scheme to defraud.
Bankruptcy laws exist to help individuals and businesses obtain relief from overwhelming debt while ensuring that creditors receive a fair distribution of the debtor's assets.
However, when someone hides assets, submits false information, or manipulates bankruptcy filings for financial gain, federal prosecutors may pursue bankruptcy fraud charges.
A conviction for bankruptcy fraud can result in significant fines and up to five years in federal prison for each offense.
Because these cases often involve complex financial records and federal investigations, anyone under investigation should seek experienced federal defense counsel immediately.
For the best chance of a positive outcome, consult an experienced California federal criminal defense attorney at Cron, Israels & Stark. To schedule a consultation, call (424) 372-3112 or use the contact form here.
Understanding Bankruptcy Fraud Under 18 U.S.C. § 157
Federal bankruptcy fraud is defined under Title 18 of the United States Code, Section 157. This statute prohibits using bankruptcy proceedings to carry out a fraudulent scheme.
Under this law, a person commits bankruptcy fraud when they knowingly:
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file a bankruptcy petition as part of a scheme to defraud,
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submit documents in a bankruptcy case to further a fraudulent plan, or
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make false or misleading statements related to a bankruptcy proceeding.
Federal prosecutors must prove that the defendant knowingly engaged in a scheme to defraud and used the bankruptcy system to carry out that scheme.
Purpose of Bankruptcy Laws
The U.S. bankruptcy system is designed to balance two competing goals:
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giving financially distressed individuals and businesses a fresh start by eliminating certain debts, and
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ensuring creditors receive an equitable share of the debtor's remaining assets.
To accomplish this, bankruptcy law requires full financial transparency. Debtors must disclose all income, assets, debts, and financial transactions.
When someone intentionally conceals or falsifies this information, it undermines the fairness of the bankruptcy process and can trigger federal criminal charges.
Common Examples of Bankruptcy Fraud
Bankruptcy fraud can take many forms. Federal investigators frequently encounter several common schemes.
Concealing Assets
The most common type of bankruptcy fraud involves hiding assets from the bankruptcy court or trustee.
Examples include:
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transferring property to friends or family before filing bankruptcy,
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placing funds in offshore accounts,
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failing to disclose real estate, vehicles, or investment accounts.
If the court is unaware of these assets, creditors may receive less than they are legally entitled to receive.
Undervaluing Property
Another common scheme involves intentionally listing assets at far below their actual value.
For example:
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listing a home worth $300,000 as worth only $150,000,
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undervaluing expensive jewelry, artwork, or collectibles,
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misrepresenting the value of business interests.
Undervaluation may allow the debtor to keep property that should otherwise be liquidated to pay creditors.
Making False Statements
Providing false information in bankruptcy documents or testimony is also a form of bankruptcy fraud.
Examples include:
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lying about income or employment,
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omitting assets or bank accounts,
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providing false statements to the bankruptcy trustee,
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submitting inaccurate financial records.
Because bankruptcy filings are submitted under penalty of perjury, knowingly false statements can lead to criminal charges.
Petition Mills
A “petition mill” is a fraudulent business that assists individuals in filing dishonest bankruptcy petitions.
These operations may:
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encourage clients to hide assets,
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file repeated bankruptcy petitions to delay creditor actions,
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falsify documents submitted to the court.
Operators of petition mills can face serious federal criminal charges.
Elements Prosecutors Must Prove
To secure a conviction under 18 U.S.C. § 157, federal prosecutors must prove beyond a reasonable doubt that:
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the defendant devised or intended to devise a scheme to defraud,
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the scheme involved the bankruptcy process, and
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the defendant knowingly carried out the fraudulent scheme.
In many cases, the most contested issue is intent. Prosecutors must show that the defendant knowingly acted to deceive creditors or the court.
Penalties for Bankruptcy Fraud
Bankruptcy fraud is typically prosecuted as a federal felony offense.
Potential penalties include:
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up to 5 years in federal prison,
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fines of up to $250,000 for individuals,
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restitution to victims,
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forfeiture of assets obtained through fraud.
Sentences are determined under the Federal Sentencing Guidelines, which consider factors such as:
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amount of financial loss,
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number of victims,
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sophistication of the scheme,
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prior criminal history.
In complex fraud cases, federal investigators may also pursue additional related charges, which can significantly increase the potential penalties.
Related Federal Crimes
Several other federal statutes are commonly charged alongside bankruptcy fraud.
Concealment of Assets – 18 U.S.C. § 152
This statute criminalizes concealing assets, making false oaths, or presenting fraudulent claims in bankruptcy proceedings.
Embezzlement Against the Bankruptcy Estate – 18 U.S.C. § 153
This law targets trustees, officers, or court-appointed individuals who misappropriate funds belonging to the bankruptcy estate.
Adverse Interest of Bankruptcy Officers – 18 U.S.C. § 154
It is illegal for bankruptcy officers or trustees to have financial interests that conflict with their official duties.
Fee Agreements in Bankruptcy Cases – 18 U.S.C. § 155
This statute regulates improper fee arrangements in bankruptcy proceedings and receiverships.
Knowing Disregard of Bankruptcy Law – 18 U.S.C. § 156
This law criminalizes intentional violations of bankruptcy laws or rules by individuals responsible for administering bankruptcy cases.
Frequently Asked Questions
What is bankruptcy fraud under federal law?
Bankruptcy fraud occurs when someone intentionally uses the bankruptcy process to deceive creditors or the court, such as by hiding assets or submitting false financial information.
Can mistakes in bankruptcy paperwork lead to criminal charges?
Honest mistakes usually do not result in criminal charges. Federal prosecutors must prove that the person knowingly and intentionally committed fraud.
What is the maximum penalty for bankruptcy fraud?
A conviction under 18 U.S.C. § 157 can result in up to five years in federal prison, substantial fines, and restitution to victims.
How do prosecutors prove bankruptcy fraud?
Prosecutors rely on financial records, bankruptcy filings, witness testimony, and evidence showing that the defendant knowingly attempted to deceive creditors or the court.
Legal Defenses to Bankruptcy Fraud Charges
A strong federal defense strategy often focuses on challenging the government's claim that the defendant acted with fraudulent intent.
Lack of Intent
The most common defense is that the defendant did not intend to commit fraud.
Mistakes in financial disclosures can occur due to:
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accounting errors,
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misunderstanding bankruptcy forms,
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incomplete records.
If prosecutors cannot prove intentional deception, a conviction may not be possible.
Clerical or Filing Errors
Bankruptcy filings involve extensive financial documentation. Errors may result from:
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mistakes by accountants,
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incorrect information from financial institutions,
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typographical errors in filings.
These mistakes do not necessarily constitute criminal fraud.
Good Faith Reliance on Professional Advice
Many debtors rely on attorneys, accountants, or financial advisors when preparing bankruptcy filings.
If the defendant reasonably relied on professional advice when completing the filings, it may undermine the government's fraud allegations.
Federal Bankruptcy Fraud Investigations
Bankruptcy fraud investigations are often conducted by federal agencies, including:
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Federal Bureau of Investigation (FBI),
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U.S. Trustee Program,
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Internal Revenue Service Criminal Investigation (IRS-CI),
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Department of Justice.
Investigations typically involve reviewing:
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financial records,
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bank transactions,
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bankruptcy filings,
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witness statements.
Because federal investigators may spend months building a case before filing charges, early legal representation is critical.
Statute of Limitations
The federal statute of limitations for most bankruptcy fraud offenses is five years.
This means federal prosecutors must file criminal charges within five years of the alleged fraudulent conduct.
Why Early Legal Representation Matters
Federal bankruptcy fraud cases are complex financial investigations that can carry serious consequences. Defense attorneys may intervene early in the process to:
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respond to subpoenas or government inquiries,
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negotiate with prosecutors before charges are filed,
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challenge evidence of fraudulent intent,
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seek dismissal or reduction of charges.
Early legal intervention can significantly influence the outcome of a federal investigation.
The Los Angeles-based criminal defense attorneys at Cron, Israels & Stark are here to help. Schedule your consultation today.