A corporation’s debts are significantly reduced when it files for bankruptcy. As a result, several sorts of fraud have been encountered in bankruptcy law over the years. These scams, unlike corporate strategies, are unlawful. Numerous people have been charged with bankruptcy fraud in recent years, and several have even been sentenced to prison.
By definition, bankruptcy occurs when a borrower is declared legally insolvent, either by lenders or on his account. To settle his obligations, his property is liquidated and split among his creditors. When a debtor, on the other hand, falsely declares bankruptcy, tries to hide his assets, uses petition mills, or makes several claims, he is committing bankruptcy fraud, which is a federal crime. A bankruptcy scam is a high-level white-collar crime. You should immediately engage a criminal defense counselor, if your bankruptcy lawyer has defense experience, cooperate with them.
Types of Bankruptcy Fraud
Bankruptcy provides significant relief from creditors to the incumbent firm. Short-term debts are transformed into long-term obligations. Debt interest rates have also been cut. In a lot of circumstances, the interest costs are simply eliminated. The government, on the other hand, mandates the corporation to give a list of all assets it owns.
This sort of fraud happens when a person intentionally fails to identify all of his assets on his bankruptcy petition, knowing that creditors would be unable to liquidate items that they are unaware of. Similarly, while filing for bankruptcy, company owners typically conceal assets by money transfers or properties to family or colleagues so that the assets are not repossessed.
Another prevalent method of defrauding creditors through bankruptcy law is bargaining. To do so, the corporation first collects massive quantities of unsecured debt that it has no intention of repaying. The same company files for bankruptcy at a later date.
Unsecured creditors are now aware that if the firm files for bankruptcy, their interests may be jeopardized. This is why they are willing to accept a considerably lower rate in exchange for rapid payment. The corporation then negotiates with practically all of its creditors, paying barely a fraction of what it owes in the first place. The corporation then retracts the bankruptcy petition once all of the debts have been paid.
Embezzlement / Blow out
A blowout is a type of bankruptcy fraud in which the firm facing bankruptcy was built from the ground up to collapse. The corporation is founded and operated as a legitimate business for some time. This is done to improve credit scores and establish a credit profile with suppliers.
Following the creation of the credit profile, the firm begins to increase its orders and quickly racks up large expenditures.
This indicates that the corporation has sufficient funds to settle its outstanding debts. It, on the other hand, employs accounting gimmicks to defer payment of the debt. Meanwhile, a complicated network of corporations is used to embezzle the debt. The firm eventually declares bankruptcy. The money is then embezzled as a result.