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What Is Bankruptcy Fraud?

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By Author: Getlegal
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When we speak about bankruptcy, it certainly paints a grim picture of a shady business related to money. Due to unavoidable circumstances like mismanagement of funds, frauds within the company, and economic scenarios, and even as we pass through the pandemic era, a business may have to face uncertainties to generate profit. Consequently, it affects the employees and their ability to repay their dues to a financial institution.

Bankruptcy fraud can occur in various ways. A debtor declares that they no longer are in a condition financially to cover the dues and other obligations personally or for the business.
The government intervenes and supports the individual or the company in such scenarios when people misuse the bankruptcy law to liquidate their company or personal assets while hiding or not to prove the exact information about their financial situation.

There are four chapters in the bankruptcy code that can declare a person is eligible to file for bankruptcy.

Chapter 7-
At a given point of time, if the company’s financial situation is no longer stable, & it has reached an end of bankruptcy due to unpaid debts or loss. A company can file for closure and liquidate.

Chapter 11-
Chapter 11 deals with bankruptcy that we usually observe at large corporations or businesses. Organizations who wish to continue their business will share their financial status with their creditors to reorganize their debts.

Chapter 12-
The bankruptcy law allows ‘farmers’ and ‘Fishermen’ to apply for bankruptcy and reorganize their finances to repay their creditors through a payment plan. It also safeguards them against interest rates and penalties.

Chapter 13-
An individual can also apply for bankruptcy. Under chapter 13, they can file a bankruptcy wherein there is a need to reorganize their finance to repay their creditors.

Following are some types of bankruptcy fraud cases:

1. Window dressing a balance sheet
A balance sheet can show the assets and liabilities of a company at a given point in time. However, when a company files for bankruptcy, the purposely will hide assets to show increased liabilities. Concealment of properties or not putting them upright as an investment is a crime under bankruptcy law.
Also, the assets’ actual value is hidden or inaccurately calculating the depreciation to show that it is undervalued.

2. Petition Mills
A Petition Mill is an organized bankruptcy crime in the US. Ponzi schemes lure desperate tenants who are financially dreaded, claiming to assist them financially. However, such plans end up filing for bankruptcy on behalf of the tenant. The tenants end up paying a high price fee for the scheme under the fear of getting evicted.

3. Applying for loans or credit cards with no intention to payback
Individuals apply for loans and do not repay the banks and or financial institutions. Filing for bankruptcy under chapter 7 allows a recitation to the debtor. However, in many cases, chapters 7 and chapter 11 are used for misappropriation when the debtor doesn’t intend to repay creditors. In such a case, the creditors have the right to hire a bankruptcy lawyer to tackle the fraudulent bankruptcy filing from the debtor.

4. Incorrection documentation or incomplete information
There can be an unintended fraud when the bankruptcy documents are submitted incorrectly or incompletely. A debtor will not get directly accused of submitting incomplete information. But failure to correct the records and the details might lead to bankruptcy fraud. It gets usually used as evidence when creditors fail to resubmit the correction information. Only a Texas Bankruptcy Attorney can help the debtor legally fight the allegations and prove innocence by gathering evidence.


Every bankruptcy fraud begins with an intent to commit it. There is little to no scope wherein an accused can claim that the scam gets committed unintentionally. In such cases, the individual or the organization can be held liable for withholding accurate financial information or misrepresenting the information to benefit from bankruptcy law. A qualified bankruptcy lawyer in such a case can assist creditors in dealing with such fraud. Bankruptcy lawyers play an essential part in proving the actual financial state of the debtor or his business. The best possible routes are approved to avoid the least damages to the debtor.

For more information visit: https://www.getlegal.com/legal-info-center/criminal-law/bankruptcy-fraud/

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