Bankruptcy Fraud: Texas Criminal Defense Overview

The United States Supreme Court established long ago that the United States Bankruptcy Code exists to provide a “fresh start” to those who seek relief under its provisions, where they can have “… a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U. S. 234, 244 (1934). SCOTUS also warns that this “fresh start” is provided under the law only to the “honest but unfortunate debtor.”  Id., 292 U.S. at 287.

Therefore, if there is any suggestion or suspicion that an individual or company is seeking a “fresh start” under bankruptcy law with fraudulent intent, there may be formal allegations and prosecutions based upon the crime of bankruptcy fraud.  These cases are pursued as criminal matters by the AUSAs in the appropriate Office of the United States Attorney General’s Office.

Of note, as financial pressures increase with current and forecasted economic crises (e.g., inflation) and unprecedented events like the lockdowns of the COVID-19 pandemic, it is expected that bankruptcy relief will be considered or formally filed in much greater numbers in the future.  Read, “A Wave of Bankruptcies and Foreclosures Appears to be Building,” written by William Lobel, Esq. and published by Kiplinger on February 12, 2022.

Bankruptcy Protection in Federal Court: What is Bankruptcy?

Bankruptcy exists entirely within the federal system, from early considerations of an individual or company about filing for relief pursuant to the United States Bankruptcy Code (“Bankruptcy Code”) to any investigation or prosecution of bankruptcy fraud or malfeasance in violation of its provisions.  There is no Texas state system for bankruptcy relief.  Only lawyers licensed in federal court can represent clients in bankruptcy filings as well as in the criminal defense of bankruptcy fraud charges.

Types of bankruptcy

The Bankruptcy Code creates three forms of bankruptcy, commonly referred to as “Chapter 7,” “Chapter 11,” or “Chapter 13” filings. All three forms of bankruptcy will impact credit ratings.  None of them may be able to wipe out all the debt involved. Both Chapter 11 and Chapter 13 involve repayment plans.  There is no repayment plan in Chapter 7 bankruptcy.

Chapter 7

The main distinction for these three versions is that in Chapter 7 bankruptcy filings, the assets of the filer (called “debtor”) are sold off to pay the lenders (called “creditors”).  Something called a “means test” must be met.  Chapter 7 protection can be sought by individuals and companies.  The assets of the debtor are sold off to pay the creditors, with some assets being exempt (e.g., homestead).  The unpaid debt balances are “discharged” or erased.  Examples here include medical bills and credit card balances. This is known as “liquidation bankruptcy.”

Chapter 11

Comparatively, in Chapter 11, the debtor and the creditors negotiate to alter the terms of their bargain and the debtor’s assets are not sold in order to pay the debt.  Chapter 11 is available to individuals or businesses.  It has no statutory prerequisites for income or for debt amounts before filing.  This is known as “reorganization bankruptcy.”

Chapter 13

Chapter 13 can only be filed by individuals.  Businesses cannot file for Chapter 13 protection.  To qualify for Chapter 13, the person must confirm a stable income.  There are debt limitations for filing under Chapter 13.  With Chapter 13, unsecured debt can be discharged while secured debt (think car loan) can be renegotiated for the benefit of the debtor in a court-approved repayment plan.

The crux of bankruptcy law is that in exchange for the “fresh start” granted to the debtor under the Bankruptcy Code, creditors will be protected as much as possible in minimizing their losses.  All the debtor’s assets will be considered under the Bankruptcy Code as they are identified (“disclosed”) by the debtor.  Hiding any asset, or fudging on its value or condition, etc., can form the basis of allegations that the debtor has committed the crime of bankruptcy fraud.

How Bankruptcy Protection Can Turn Into Criminal Prosecution

Bankruptcy fraud is a criminal act defined in 18 USC § 157, which provides as follows:

A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so—

(1) files a petition under title 11, including a fraudulent involuntary petition under section 303 of such title;

(2) files a document in a proceeding under title 11; or

(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title.

Notice that the criminal statute includes both the actual activity as well as the intent to do so. Intent alone can result in a criminal conviction.

Upon conviction, the defendant faces a sentence involving monetary fines as well as imprisonment of up to five (5) years.

This statute works in tandem with 18 USC §152, which provides that a person who does any of the following will face a sentence involving a significant monetary fine and imprisonment of up to five (5) years:

(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor;

(2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11;

(3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11;

(4) knowingly and fraudulently presents any false claim for proof against the estate of a debtor, or uses any such claim in any case under title 11, in a personal capacity or as or through an agent, proxy, or attorney;

(5) knowingly and fraudulently receives any material amount of property from a debtor after the filing of a case under title 11, with intent to defeat the provisions of title 11;

(6) knowingly and fraudulently gives, offers, receives, or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof for acting or forbearing to act in any case under title 11;

(7) in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation;

(8) after the filing of a case under title 11 or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor; or

(9) after the filing of a case under title 11, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court or a United States Trustee entitled to its possession, any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor.

Civil Bankruptcy Fraud:  Fraud Alleged by A Creditor

Within the bankruptcy court, there may also be civil claims filed for fraud where an “adversary proceeding” is requested by a creditor alleging wrongdoing by the debtor involving a specific debt.  If successful, the creditor can get an order that protects the debt from being discharged.  These do not involve criminal allegations or sentencing.

Criminal Bankruptcy Fraud

However, when things appear to impact more than one creditor, then investigations may delve into the entirety of the debtor’s actions to find instances of criminal bankruptcy fraud.  These are handled by the Federal Bureau of Investigation (“FBI”).  The FBI investigations often expand into considerations of other white-collar crimes as well, such as money laundering, wire fraud, tax fraud, credit card fraud, or bank fraud.  For more on white collar crimes, read: White Collar Crime: Indictments Of Texas Professionals.

Investigation of Criminal Bankruptcy Fraud Allegations

The FBI describes its role as thwarting “the unscrupulous” who are trying “to get out of paying their debts” as well as discovering “financial fraudsters” who use the Bankruptcy Code to “prolong their white-collar schemes – buying time before the game is up for good.”

Investigators will use their past experience as well as historic fraud prosecution statistics to try and substantiate any type of criminal activity through a vast, invasive combing of the debtor’s finances. They may work in partnership with agents of the Internal Revenue Service or special federal task forces.

Furthermore, reports of suspected Bankruptcy Fraud are required by 18 USC 3057(a) to be made to the AUSA by any judge, receiver, or trustee with “reasonable grounds” to believe a crime has occurred.

The most common complaints that result usually involve things like:

1. Failing to disclose assets (“Concealing Assets”) through omission in the paperwork
2. Failing to disclose assets (“Concealing Assets”) through a straw man (i.e., gifting)
3. Falsifying information in the bankruptcy paperwork by failing to provide information
4. Falsifying information in the bankruptcy paperwork by giving false information
5. Falsifying information in the bankruptcy paperwork by hiding records
6. Filing a bankruptcy petition under a false name
7. Filing a bankruptcy petition in more than one jurisdiction
8. Filing a bankruptcy petition multiple times using false identities
9. Taking money out of the bankruptcy estate (embezzlement).

From the FBI comes the following warning: “… we take our responsibility to pursue allegations of bankruptcy fraud very seriously. We focus on cases with large dollar amounts, the possible involvement of organized crime, and suspects who file in multiple states. Currently, we have nearly 300 pending bankruptcy fraud cases open around the country.”

Prosecution of Criminal Bankruptcy Fraud Allegations

Once the allegations of bankruptcy fraud have been forwarded to the AUSA by either the FBI or a bankruptcy judge, receiver, or trustee, the federal prosecutor makes the call on whether or not to pursue criminal charges against the debtor.

To do so, the AUSA must have authenticated and admissible evidence of proof of fraud as defined in the above-referenced bankruptcy crime laws, 18 USC §152 and 18 USC § 157.

This essentially entails proof of either the debtor knowingly acting to misrepresent a material fact regarding the bankruptcy – or having the intent to do so, even if there was no actual fabrication or bad act.

Defense Against Allegations of Criminal Bankruptcy Fraud in Texas

Accordingly, the bankruptcy fraud criminal defense attorney will undertake to review each and every facet of the AUSA’s decision to press charges.  The key here is the information itself:  in order for the accused to be convicted, there must be sufficient evidence of inaccurate information being provided in the process intentionally in order to benefit the debtor in some way.

Intent must be shown with facts not supposition.  The defense lawyer will carefully consider all evidence of intent, together with the source of the government’s case for violations of due process and procedural nonconformities.  How did the agents get the information?  Were constitutional protections respected?

Moreover, the financial burdens on anyone considering bankruptcy can be enormous, and the filing of the petition may offer little relief from the stress.  It is only human for someone to have made one or more honest mistakes in these matters.

Honest mistakes are not intentional misconduct, and if the defense can demonstrate the lack of intentional wrongdoing, there may be a successful defense to the bankruptcy fraud charge.

Common, honest mistakes by a debtor can include things like:

• missing a deadline;
• failing to include an account in some paperwork;
• getting the wrong value for an asset (such as a car); and
• not filling in all the forms completely and properly.

If the debtor has done things which were viewed as acceptable but are now challenged by the federal government, then the criminal defense attorney may need to independently investigate the details of the situation.  There may be support for negotiations with the prosecutor for things like gifting large amounts of cash before filing the bankruptcy petition, charging expensive items on a credit card a short time before filing, or selling property for much less than its fair market value to a friend.

Negotiations may result in plea deals for a lesser charge or lower sentence. See, Plea Bargaining and Making Deals in Federal Felony Cases: Criminal Defense Overview.

Anyone facing possible investigation or arrest for criminal bankruptcy fraud is wise to consider having the support of an experienced federal criminal defense lawyer at their side.  This is particularly true given the federal government’s proclivity for expanding these cases into much larger white collar crime complaints.

For more, read:

• Loss Amounts in Federal Sentences: Calculating Economic and Financial Losses in Federal Felonies
• Electronic Surveillance Under Federal Law: Criminal Defense Considerations in 2021 
• Things to Know about Wire Fraud Today: It’s a Big Deal
• Money Laundering and Federal Sentencing Guidelines.

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For more information, check out our web resources, read Michael Lowe’s Case Results, and read his in-depth articles,” Pre-Arrest Criminal Investigations.”