December 15, 2019

Bankruptcy Fraud: Don’t Cross that Line!

bankruptcy fraudNews reports indicate that former baseball star Lenny “Nails” Dykstra has been charged with bankruptcy fraud by a California based United States Attorney.  Dykstra filed for Chapter 7 bankruptcy in 2009, scheduling $31 million in debts and only $50,000 in assets.

In the complaint, prosecutors allege that Dykstra sold or destroyed over $400,000 worth of property.  Among the property that Dykstra allegedly sold – presumably to raise case – were sports memorabilia and furnishings from the home he lost in the bankruptcy.

Obviously most of the Chapter 7 cases filed in the Northern District of Georgia, or in most bankruptcy courts do not involve millions of dollars of debts incurred by a high profile debtor.  However, there is an important lesson that all bankruptcy filers can learn from the charges levied against Mr. Dykstra. [Read more…]

Real Housewife Star Teresa Guidice Faces Allegations of Bankruptcy Fraud

United Press and about two dozen tabloid web sites and blogs are reporting that reality TV star Teresa Guidice, and her husband Joe have been sued by their Chapter 7 trustee for failing to report assets in their bankruptcy petition.  Guidice, one of the “Real Housewives of New Jersey,” apparently signed a book contract for a cookbook that will pay her $250,000 but failed to reveal that asset on her petition.  The trustee also alleges that the tax returns submitted by Teresa and her husband were fraudulent as well.

Setting aside the question of why a book publisher thinks it can make back a quarter of a million dollars on sales of  Teresa Guidice’s “Skinny Italian” cookbook, what Teresa and her husband are facing is a complaint under Section 727(a)(4) of the Bankruptcy Code, which bars a Chapter 7 discharge to a debtor who knowingly and fraudulently, in or in connection with the case—

(A) made a false oath or account;
(B) presented or used a false claim;
(C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act; or
(D) withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs;
According to the trustee, Teresa’s book contract is an asset of the estate and these funds should be available to creditors.  If the trustee is successful with his complaint, Teresa and Joe’s Chapter 7 case will be dismissed and their creditors will have free rein to initiate collection activities against them.

Examples of Bankruptcy Fraud

bankruptcy fraudLast October, I wrote a post on this blog about bankruptcy fraud, and pointed out that everything included in a bankruptcy filing is subject to scrutiny by the office of the United States Trustee, which is an arm of the United States Department of Justice.  In other words, false statements on a bankruptcy petition could land a debtor in hot water – dismissal of the bankruptcy case, fines and even prison.

Because the bankruptcy process can seem informal, it can be easy to forget that a Chapter 7 or Chapter 13 filing is made up of documents filed in a federal district court and subject to investigation by the F.B.I.

Attorney Gini Nelson, a New Mexico bankruptcy lawyer, recently published a post about bankruptcy fraud in the Bankruptcy Law Network blog.  Gini’s post includes a link to the IRS.gov site containing examples of bankruptcy fraud investigations.   I found the IRS.gov link especially interesting in that one can get a sense of the type of fraud that bankruptcy debtors have attempted and the level of fraudulent activity that generated prosecution.  Given the highly interconnected and electronic public record access that is available to bankruptcy trustees as well as government investigators I can’t believe any of these folks believed that they would not be caught.

Failure to Disclose Assets Lands Chapter 7 Debtor in Prison

Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts.  This particular debtor used Chapter 7 to discharge over $1 million in liabilities.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor’s case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a “poison pen” letter to the trustee will allegations about improper activities by a bankruptcy debtor. [Read more…]

FBI Warns Against Bankruptcy Fraud

My Bankruptcy Law Network colleague Rachel Foley from Kansas City has written a useful article on the Bankruptcy Law Network blog that brings to light a problem that many debtors (and perhaps many debtors’ attorneys) don’t think about too much – bankruptcy fraud.

FraudIn my practice I observe that when they come to meet with me many prospective bankruptcy filers are angry – angry at harassing creditors, angry at their employer for cutting hours or jobs, and angry at some of the rules that apply when one files bankruptcy.   Despite what some in Congress may say, no one wants to file bankruptcy and I have met many very nice, reasonable people who feel that they played by the rules and now they are going to have to start all over at age 40, 50 or older.

The net result of this anger sometimes is a sense of “us against them.”  Sometimes this manifests itself in an attitude that the debtor will follow the rules mostly but who is going to harm if they don’t reveal a cash payment to a relative or the transfer of an old car to a brother.

As Rachel points out in her fine post, this sort of an attitude can really get you in trouble.

When you sign your name to a bankruptcy petition, you are declaring under oath that the information contained therein is truthful and accurate.  If you leave something out intentionally you may not get caught, but, then again you may.  The  U.S. Trustee and the U.S. Attorney have been known to prosecute debtors to set precedent. [Read more…]

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