Situational Bankruptcy Fraud

Investigators that work for IRS should have one common trait and that is honesty. If you are dealing with bankruptcy laws and investigating financial crimes you have to love your country and you have to protect the real hardworking citizens that are living around you. This is the main purpose of those who consider themselves the defenders of the weak. A few months ago I had the chance to interview a good friend of mine who works as government investigator and is considered to be one of the top specialists in bankruptcy laws. He is quite humble and agreed to answer a few questions about bankruptcy fraud in general. So here it is!

Me: Hey there Mike! Thanks for accepting to offer this interview for my readers! This really means a lot to me!
Mike: Good day Hellen! No problem at all! A friend in need is a friend in did, they claim…

Me: Alright, so let’s get started, shall we?
Mike: Let’s go!

Me: What is the real intention of most bankruptcy laws that exist nowadays?
Mike: Most of the laws that were created to prevent certain negative aspects of those who go bankrupt from affecting honest people are in fact quite effective nowadays. These have the intention of offering a fair approach for the majority of the existing creditors out there when certain people or even businesses appear to have much more debt than they are able to repay, even in the long run. However, for some companies (which appear more tricky than the law), bankruptcy is a chance to start all over. But, as always, despite the noble means of doing things in this life, more than 150k cases per year involve or come close to what we call bankruptcy fraud. This is the reality.

Me: Can you talk a little bit about the most common types of bankruptcy fraud?
Mike: Sure. I’m going to talk as primitive as possible in order for every citizen of USA to understand my speech. I’m certainly not going into the complicated financial terms because in the long run that is absolutely no use for people out there. So basically most of the cases that deal with bankruptcy can be divided into two main types. These are always sorted by the way they occur and are sorted as “planned” and “situational” (of natural occurrence).

Me: Would you be so kind and explain further (in detail) what situational bankruptcy is all about?
Mike: Okay. So when dealing with a situational type of bankruptcy fraud, the debtor (which can be represented by either an individual or a company) does not intentionally think or plan to do the fraud. It just happens naturally, due to the nature of the business he or she is running. Nevertheless, the element of the fraud still exists and reveals itself the moment that particular entity is facing the possibility of losing everything. When reaching this moment, 95% of the people usually commit the crime by attempting to hide or slightly take of the real value of the property (or whatever is being hidden). Most of the specialists that I had the chance to talk with say that approximately 70% of all the cases related to bankruptcy fraud are nothing more than situational bankruptcy, meaning a person really failed with his business, but tried to run away from everything being taken away from him.

Me: Mike, which are the specific types of frauds related to bankruptcy which fall under this category?
Mike: Sure, these are: 1) false statements & 2) sham transactions.

Me: Please be more explicit on false statements.
Mike: No problem at all. In order to hide certain assets from those who are creditors and might one day take everything back and sell it in order to return their investment, a debtor “fails” (on purpose) to list everything they own or have on those papers which are filled and presented with the court. There are different types of assets. Some of them might include certain bank accounts, gold (as jewelry), famous and quite expensive artwork, different interest rates in companies or even real estate properties. Hiding these is often quite easy and tracking them down appears to be quite hard, that’s why some just happen to pass unnoticed.

Me: How about undervaluing certain assets that they do present? Does it often happen?
Mike: Yep, undervaluing and sometimes even grossly doing it for certain assets that are listed with the court is a common thing done by debtors lately. Their main goal is to convince the creditors not to spend their “precious time” trying to take over a property that costs so little in order to pay their debts. Do you get the idea?

Me: Isn’t this actually the fraud?
Mike: Yes it is. Filling wrong or even false declarations in a proceeding that deals with bankruptcy is considered absolutely bankruptcy fraud and is punished by the law of United States. Those who are going to read this interview must know that it consists of a pretty high fine of about $300k and up to five years of prison. I think that would make everyone think about doing something like this again.

Me: I agree. Mike, I think my readers would also like to know more about sham transactions.
Mike: This is something that everyone should know about. These transactions usually take place when the person who is experiencing bankruptcy, aka the debtor, finds out that bankruptcy is just one step away and there is no use of hiding or running. The actual transfer of the ownership’s key assets to a third party is known as sham transactions. However, what really happens behind the curtains is the following. The two have a serious talk before doing that and they basically agree that after the actually bankruptcy happens, naturally, the actual property will be given back to the initial debtor. What do you think about this scheme? Pretty ingenious, huh?

Me: Are there any other types or situations in which other type of sham transactions occur?
Mike: Yes there are. What often occurs during bankruptcy and is also related to sham transactions is represented by the very moment when the debtor gets the approval of the court to sell a certain asset; however, there is one pretty firm condition that is not respected in this case: the transaction is not supervised by the court; the debtor and the buyer made a hidden (a side) agreement that only they know about and because the sale price approved by the court might be quite under the real value of the property, an additional payment is always slipped under the table to the debtor. This is also a type of transaction that has the label sham, or even shame, ha-ha-ha. Let me tell you that certain schemes of this kind also assume totally false statements (18 U.S.C., Section 152) and are being punished by the law of US with up to five years of staying away from your daily freedom, in jail, of course.

Me: Great Mike, that’s so really interesting information. Due to the fact that it’s already getting late I would ask you to continue tomorrow morning, with more about planned bankruptcy frauds. Good night!
Mike: I’m going to continue to talk tomorrow. Good night Hellen!

To be continued… in “Planned Bankruptcy Fraud” …