Bankruptcy Fraud Essay Example

The first segment deals with creditor claims including their priority and allowance, claim parameterization, and distribution of estate assets. The second segment concentrates on debtor duties like allowable exemptions and discharge of obligations. Lastly, portion three explores various bankruptcy-related aspects such as property of the estate recovery of avoidable transfers contractual rights of the estate obtaining credit on behalf of the estateThe Congress established the bankruptcy administrator program in 1986 to oversee bankruptcy cases separately from the United States Trustee program, which collaborates with the Department of Justice. Currently, there are six offices in Alabama and North Carolina responsible for maintaining a list of verified credit counseling agencies and debtor education services. These offices handle multiple parties involved in bankruptcy cases, including the examiner, debtor, creditor (secured or unsecured), and adjustor. Examiners specifically investigate fraud allegations in Chapter 11 cases. The term "debtor" refers to individuals, partnerships, or corporations filing under Title 11. In this context, the definition of "person" is broad and encompasses various financial situations. If a municipality qualifies as a debtor by being a political subdivision, public agency, or instrumentality of a state.Creditors hold claims that can be classified as secured or unsecured.Secured creditors have identified property as security interest in the bankruptcy case while unsecured creditors had pre-existing claims before the petition was filed.Adjustors carry out minor trustee responsibilities based on guidelines provided by the Fraud Examiners Manual.Creditors possess rights and remedies such as investigating payment issues and consulting other creditors for restitution details.Access to the debtor's credit history through credit bureaus is available, and a creditor can file a motion to appoint a trustee with other creditors having the ability

to join. The appointment of a trustee must be justified by demonstrating suspicion of fraud and necessity in overseeing the debtor's operations. To prove fraudulent conduct, sufficient documentary evidence and other forms of evidence, including witness statements, must be provided by the creditor. A hearing will take place where both supporting and rebuttal arguments regarding the fraud allegations will be considered by the Judge. In certain situations, an examiner may be appointed instead of a trustee as a less intrusive approach at the discretion of the Judge. The primary responsibility of the examiner towards creditors is to investigate and report to the Judge if there is evidence supporting fraud allegations. If the debtor fails to file for bankruptcy, then creditors have rights to join together and submit an involuntary petition against them (Fraud Examiners Manual). The statutes for bankruptcy laws in the United States are established in Article One, Section 8, Clause 8 of the Constitution with an aim towards creating consistent rules and laws concerning bankruptcies across all states within the country. The Office of United States Trustee collaborates with Department of Justice in administering bankruptcy cases which includes appointments for trustees, examiners, and committees specifically in chapter eleven bankruptcies.This office, as stated in the Fraud Examiners Manual, is responsible for overseeing trustees and reviewing employment and fee applications. Its main objective is to protect and preserve the integrity of the banking system. The Bankruptcy laws were established by the Legislative branch, including specific statutes such as 18 U.S.C.151, 18 U.S.C.152, 18 U.S.C.156, 18 U.S.C.157, and 18 U.S.C.1519 (Fraud Examiners Manual). Additionally, they created the United States Sentencing Commission with the goal of developing

a proportional sentencing system (Sans). Punishments for these offenses can include fines of up to $500,000 and a maximum prison sentence of five years or both. Among these statutes, 18 U.S.C.152 is particularly comprehensive with nine paragraphs explaining its provisions. According to the Department of Justice's explanation:

1) Under statute 18 U.S.C.151, individuals who knowingly and fraudulently conceal property from court officers or creditors in a Title 11 case will be held accountable.
2) Individuals who knowingly provide false oaths or accounts in relation to a Title 11 case will be held accountable under statute 18 U.S.C.152.
3) Knowingly providing false declarations, certificates, verifications or statements under penalty of perjury as permitted by section 1746 of Title 28 in relation to a Title 11 case constitutes fraudulent behavior according to this office's regulationsThe text discusses unethical conduct in relation to financial matters in a title 11 case, which includes giving, offering, receiving, or attempting to obtain money or property for specific actions. These actions can lead to penalties such as fines and imprisonment. This section addresses the intentional transfer or concealment of personal or corporate property with knowledge and fraudulence before a title 11 case. The purpose of these actions is to evade the provisions outlined within title 11. Specifically, this passage focuses on various actions involving tampering with recorded information related to a debtor's assets and financial affairs after filing for bankruptcy. Paragraph one highlights the consequences of knowingly and fraudulently withholding this information from court officers. Subsection two pertains to hiding or suppressing assets that belong to the estate. Subsection three refers to deceptive oaths or false accounts given during legal proceedings.Lastly, paragraph three discusses

false declarations made in written documents and court filings, including unsworn declarations made under penalty of perjury. Additionally, paragraph four of Title 18 U.S.C.S 152 aims to prevent creditors from submitting fictitious or exaggerated claims in bankruptcy cases. Subsection five addresses parties associated with the debtor fraudulently receiving property, which aligns with the implication of paragraph one for such parties. The sixth subsection focuses on extortion and bribery, specifically fraudulent destruction or alteration of documents. This applies to cases where a party is expected to be declared insolvent and targets individuals who unlawfully transfer property belonging to creditors of the potential bankruptcy estate. Moreover, the final subsection handles fraudulently concealed documents.Title 18 U.S.C.S 156 is another federal statute concerning bankruptcy filings and has close connections to the petition preparer. If a bankruptcy case or related proceeding is dismissed due to intentional ignorance of Title 11, United States Code, or the Federal Rules of Bankruptcy Procedure by a bankruptcy petition preparer, they may face fines, imprisonment for up to one year, or both. This section primarily addresses actions of the bankruptcy petition preparer defined as any individual other than the debtor's attorney or attorney's employee.Violations are classified as Class A misdemeanors.Furthermore, Title 18 U.S.C.S 157 addresses bankruptcy and dishonesty, stating that individuals who engage in fraudulent activities during bankruptcy proceedings may be fined, imprisoned, or both. This law specifically targets fraud schemes like petition mills that deceive landlords.
Additionally, under 18 U.S.C.S 1519, obstructing or opposing an officer executing legal writs can result in fines or imprisonment. This law also covers harm caused to officers during the execution of such documents. President George W. Bush signed this

statute into effect as part of the Serbian - Solely Act in 2002 to combat the crime of modifying or destroying filed documents under Title 11. The punishment for this offense is up to twenty years of imprisonment.
Lastly, President George W. Bush enacted The Bankruptcy Abuse Prevention and Consumer Act (BACKPACK) in 2005. This legislation brought significant reforms to the bankruptcy code for the first time since its establishment in 1978 and imposed additional requirements for debtors before declaring bankruptcy. These revisions were not a response to an economic crisis but aimed at achieving a balance between the interests of debtors and creditors.The objective of the legislation was to empower creditors, provide clarity, and bring about significant changes in debtor-creditor relationships. One notable requirement introduced is known as the Meaner Test, which allows a trustee or creditor to request dismissal of a chapter seven filing if the debtor's income exceeds the state median income. Additionally, mandatory credit counseling is now mandated for debtors unless they have already received counseling from an approved credit-counseling organization. Completion of credit counseling is necessary before becoming a legitimate debtor.

Furthermore, this act places responsibilities on the debtor by requiring completion of an educational course on personal finance management in order to be granted Chapter 13 exemptions by the court. The legislation also acknowledges that debts exceeding $500 owed to a single creditor for luxury goods acquired within 90 days of filing and cash advances of $750 within 70 days are not eligible for discharge.

Finally, it states that a debtor cannot receive a discharge under Chapter 7 if they have previously received one within eight years prior to filing (Fraud Examiners

Manual). This law was enacted in response to fraudulent cases such as the downfall of Enron Corporation – once an esteemed gas pipeline company in the US – which faced bankruptcy due to falsifying financial statements in collaboration with Arthur Anderson, an accounting firm.Enron, known for its focus on energy stock trading, also engaged in creating shell companies. Accountants and auditors involved in public business reporting faced severe penalties due to this practice. As a result, businesses are now required to undergo independent audits by external auditors. This incident served as a lesson for the government and other nations, highlighting the necessity of loose regulations to safeguard the economy from future risks (U.S. Congressman Deed Royce).

The recent bankruptcy declaration of MFC Global is directly linked to corporate fraud, although the nature of this fraud within the establishment remains uncertain within the legal community. The case involves suspicious wire transfers that resulted in a significant loss of $900 million in customer funds at MFC Global Inc. CAME, overseeing MFC Global, discovered this shortfall one day before notifying U.S regulators on October 30th. This case is filled with fraudulent activities and hopes are high for justice to be served soon.

Bankruptcy fraud can occur through various planned agreements and methods. Different fraudulent schemes are examined in the article including Concealment of Assets, Opinion scheme, and Bernie Maddox's case. People have continuously attempted to enhance these schemes unlawfully protecting their own interests over time.

The Concealment of Assets scheme specifically involves intentionally omitting certain assets from a bankruptcy claim form so that creditors cannot seize undisclosed valuable items. This scheme is commonly employed by those filing for bankruptcy.The Opinion scheme,

which promises high investment returns, often leaves investors struggling to recover their investments when it collapses. Bernie Maddox's case serves as a well-known example of this scheme, as he admitted guilt to multiple criminal charges including investment adviser fraud, wire fraud, mail fraud, money laundering, perjury false statements and filings with the SEC as well as robbery from an employee benefit plan. Maddox was sentenced to 150 years in prison and ordered to pay penalties totaling $171 billion, resulting in the loss of all his personal belongings such as real estate properties, investments, savings accounts, and other assets (CAR Online).

Another fraudulent activity called Petition Mill occurs when a third party poses as a financial advisor or credit counselor or paralegal. This text describes various fraudulent schemes related to bankruptcy. In one scheme, debtors' information is collected under the false pretense of fighting eviction while secretly filing for bankruptcy and harming their credit score. Multiple Filings is another scheme where debtors file for bankruptcy in multiple states but deliberately omit certain assets to conceal them. This is connected to the Concealment of Assets scheme. Planned Busted involves intentionally acquiring goods from creditors during bankruptcy proceedings and disposing of them without payment.The Corporate Raider subsection within this scheme involves the acquisition and operation of a solvent company with liquid assets by insiders for their own benefit. This is followed by filing for Chapter 11 bankruptcy.

The White Knight subsection, on the other hand, entails the hiring of a professional consultant to implement new financing procedures for a struggling business. In certain cases, this consultant assumes control over financial operations and acts as an owner in order to

convert company assets.

In the Parallel Entities subsection, a well-established business facing financial difficulties establishes a new company in the same industry shortly before filing for bankruptcy. Insiders continue to run the business until they successfully transfer inventory, receivables, customers, and goodwill to the newly formed company with legal assistance. They utilize funds from the debtor's account to purchase goods and services for the new company without intending to reimburse Chapter 11 administrative creditors.

Another type of fraud known as Assignment for the Benefit of Creditor (ABC) occurs outside of bankruptcy workouts by deceiving creditors. This results in selling assets at low prices to undisclosed insiders. Secured creditors typically approve this transaction as it enhances their security if the new company becomes debt-free.

Bankruptcy fraud is a major concern in the United States, especially during times of economic turmoil when bankruptcy becomes an undesirable reality.Individuals and corporations may engage in fraudulent activities to safeguard their assets and investments, making it crucial for the government to thoroughly examine bankruptcy filings. The cases of Bernie Maddox and Enron Corporation emphasize the need for stricter regulation. Inadequate regulation can have significant global economic consequences, as seen in the Enron scandal where multiple stakeholders and shareholders suffered substantial losses due to deceitful practices. Currently, only bankruptcy fraud cases involving large sums are typically pursued legally, while many incidents go undetected or are prematurely dismissed due to insufficient evidence. According to the United States Department of Justice, approximately one out of every ten cases involves some form of deception.