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Under What Federal Statutes Can I be Criminally Prosecuted in a Bankruptcy Case?

Bankruptcy is a Federal legal process of a civil nature. That is, it is not an interaction with the criminal legal process in the United States. Instead, it is an action that one initiates voluntarily to request a civil remedy from the U.S. legal system.

 

In this case, the remedy being sought is a discharge of one’s debt, a process which includes, in Chapter 7 or Chapter 13 bankruptcy, injunctive relief. This injunctive relieve comes in the form of the “automatic stay” preventing creditors from pursuing the bankrupt individual for collections during the pendency of the bankruptcy case and the ultimate “discharge injunction” requiring that creditors never again attempt to collect that debt.

 

Money judgments, relief from money judgments, and injunctive relief are all legal remedies of a civil nature rather than punitive, or criminal.

 

However, a Chapter 7 or Chapter 13 bankruptcy case can indeed result in a Federal prosecution of a criminal nature.

Federal criminal offenses related to bankruptcy proceedings are, perhaps more than any other type of criminal offense,  extremely easy to avoid.

 

In this article, we will examine the Federal offenses for which one can be criminally charged in a Chapter 7 or Chapter 13 (or Chapter 11) bankruptcy case, as well as the Federal statutes under which those charges may be brought.

 

First, a very brief overview of the Debtor’s obligations in a Chapter 7 and Chapter 13 bankruptcy.

 

What Is Required of a Debtor in Chapter 7 and Chapter 13 Bankruptcy?

 

In a Chapter 7 or Chapter 13 bankruptcy, the indebted person, or debtor, filing the bankruptcy is required to disclose an enormous amount of otherwise private personal information.

 

This disclosure requirement may come verbally, under questioning under oath, or, significantly in bankruptcy, in documentary form. That is, on paper, particularly in the bankruptcy petition, schedules, statements, and exhibits filed to initiate the Chapter 7 or Chapter 13 case.

 

The debtor is also required to turn over a large volume of documentation to the Chapter 7 or Chapter 13 Trustee assigned to the case, or to the US Trustee if properly demanded.

 

The debtor in bankruptcy is required to be truthful and honest in responding to questions under oath at the 341 Meeting of Creditors and other required hearings.

 

The debtor in Chapter 7 bankruptcy is required to cooperate with the Chapter 7 Trustee to the extent of the law with regard to the turnover of assets not fully exempted in the bankruptcy petition.

 

In other words, the debtor in Chapter 7 or Chapter 13 bankruptcy is required to do a lot and to explain a lot.

 

Simply gathering the documentation required by your bankruptcy attorney to properly draft the petition and schedules will be the most difficult part of the bankruptcy process for most people.

 

The client who constantly asks, “Why do you need this?” is among the least favorite of bankruptcy attorneys.

 

Why are you being asked to provide certain information?

 

Here’s why.

 

18 U.S.C. § 152: Concealment of Assets; False Oaths and Claims; Bribery

 

This Federal statute can loosely be described as providing the substance of a charge of “bankruptcy fraud.”  The filing of a Federal bankruptcy petition requires proper disclosure of all assets which is broadly construed to encompass any interest in property.  It is better to err on the side of disclosure.

 

Under this statute, a person filing for bankruptcy can be criminally charged for knowingly and fraudulently concealing from a Trustee any property belonging to the debtor.

 

Forgot to list your Lamborghini in your petition schedules, did you? This is why that’s a problem.

 

This statute also criminalizes false oaths, declarations, and statements in bankruptcy cases. You must tell the truth when you are asked questions at your 341 Meeting.

 

You must also complete the petition properly. A misstatement on a petition schedule or the Statement of Financial Affairs is a false declaration for purposes of this criminal statute.

 

As to creditors, they too can be criminally charged here for making a false claims against the debtor’s bankruptcy estate and for improperly receiving property from a debtor after the case is filed with the intent to collect a debt contrary to the purposes of the bankruptcy proceeding.

 

Bribery of anyone within the bankruptcy case is (obviously) prohibited under this statute.

 

Finally, the fraudulent transfer of property, the concealment or destruction or falsification of books, documents, records, or papers, or the withholding of any such books or records from a Trustee or US Trustee in the bankruptcy case can be criminally prosecuted under this statute as well.

 

Bankruptcy fraud carries the possibility of a fine, a maximum 5-year prison sentence—or both.

 

18 U.S.C. § 153: Embezzlement against Estate

 

This short statute makes a person criminally liable who knowingly and fraudulently appropriates to his or her own use, embezzles, spends, or transfers any property of the “bankruptcy estate.”

 

The bankruptcy estate is, essentially, the jurisdiction that the Bankruptcy Court and its functionaries have over the debtor’s assets and claims to assets and property during the pendency of the bankruptcy case.

 

This statute applies to someone who has access to or custodianship over any of that property. This could be the debtor, a creditor, a Trustee, or an employee or attorney or agent of the Trustee.

 

This offense also carries the possibility of a fine, 5 years of imprisonment, or both.

 

18 U.S.C. § 154: Adverse Interest and Conduct of Officers

 

This offense is oriented toward the Trustees rather than debtors in a bankruptcy proceeding.

 

A Trustee or other custodial officer who—

 

  • knowingly purchases any property of the estate;
  • who knowingly refuses a reasonable inspection by the parties of documents and accounts relating to the affairs of the state when ordered by the Bankruptcy Court to do so;
  • or who knowingly refuses to permit an opportunity for inspection by the US Trustee of the documents and records relating to the case

 

… is guilty of Adverse Interest.

 

The penalty here is a fine and the required forfeiture of the Trusteeship or office.

 

18 U.S.C. § 155: Fee Agreements

 

This Federal statute pertains to the fee agreements or retainer agreements struck between attorneys, Trustees, creditors, receives, and other such parties within the bankruptcy proceeding.

 

If a fee agreement is executed with the knowing and fraudulent intent to fix the compensation received by another party within the process, this criminal offense can be charged.

 

It carries a statutory fine or 1 year of imprisonment, or both.

 

18 U.S.C. § 156: Knowing Disregard of Bankruptcy Law or Rule

 

This extremely brief statute is, ironically, among the most utilized by the US Trustee’s Office in the Eastern District of Michigan for bringing criminal charges related to bankruptcy cases.

 

It pertains to so-called “bankruptcy petition preparers.”

 

These “petition preparers” are non-attorneys that provide the “service” of simply filling out bankruptcy petition forms in a “ghost writing” manner for signature and pro se (without an attorney) filing by a debtor.

This service is highly regulated under the US Bankruptcy Code, and such “petition preparers” are subject to onerous rules regarding how much they can charge for their efforts and how and in what manner they must disclose their participation.

 

A number of Detroit-based petition preparers have been criminally prosecuted under this Federal statute in recent years.  The Bankruptcy Court in Detroit maintains a list of prohibited bankruptcy petition preparers which have been found to be in violation of these rules or other Court Orders.

 

If a bankruptcy case is dismissed because of a knowing attempt by a petition preparer to disregard the rules, the petition preparer is subject to a fine and 1 year of imprisonment.

 

And, frequently, a court order forbidding them from engaging in such service in the future.

 

18 U.S.C. § 157: Bankruptcy Fraud

 

This Federal statute is a very broad.

 

In short, it allows the criminal prosecution of anyone devising or intending to devise a scheme to commit fraud in a bankruptcy case and for the purpose of committing that fraud files a fraudulent bankruptcy petition, document or makes a false or fraudulent representation before, during, or after the filing of the bankruptcy case.

 

Whereas 18 U.S.C. § 152 is very specific about the types of fraud that may be charged under that statute in a Chapter 7, Chapter 13, or Chapter 11 bankruptcy case, this statute is wide open for prosecutors’ use.

 

That said, its wide sweep can be easily avoided by simply—telling the truth and doing what you are supposed to do in a bankruptcy case. (And not filing for bankruptcy for improper purposes.)

 

The penalty here, as in § 152, is a fine or 5 years of imprisonment, or both.

 

Other Federal Statutes

 

The statutes listed above are those in the U.S. Criminal Code specifically devoted to wrongdoing within the bankruptcy process.

 

However, given the complexity of the bankruptcy process, particularly when it involves higher asset individuals and corporate bankruptcy of various sorts, other Federal criminal statutes could conceivably be brought into play as well.

 

While we won’t go into the same level of detail as to these statute as we did with regard to those above, they should at least be kept in mind.

 

This is particularly true when you, or your business, engages in various financial, contractual, or real estate-related transactions in the time leading up to the filing of a bankruptcy case.

 

Other possibly applicable criminal statutes are:

 

  • 18 U.S.C. § 371: Conspiracy to commit offense or to defraud United States
  • 18 U.S.C. § 1343: Wire Fraud
  • 18 U.S.C. § 1344: Bank Fraud
  • 18 U.S.C. § 1349: Attempt and conspiracy to commit fraud
  • 18 U.S.C. § 1348: Securities and commodities fraud

 

Bankruptcy Criminal Offenses: The Bottom Line

 

The bottom line with regard to any of the Federal criminal offenses related to bankruptcy proceedings is that, perhaps more than any other type of criminal offense, they are extremely easy to avoid.

 

First, it is extremely rare to be required to file for bankruptcy involuntarily. This is primarily something that occurs only with corporate debt relationships.

 

Therefore, understand that filing for Chapter 7 or Chapter 13 bankruptcy is a voluntary decision. It is something you are doing in order to obtain an honest and legal fresh start for yourself and your family.

 

That voluntary decision comes with the obligation to disclose a lot of information and a lot of documentation.

 

You will be the one who needs to properly account for this. Your bankruptcy lawyer will not visit your house and cannot read your mind. You will need to put some muscle into your own bankruptcy case. Your discharge of debt is something to which you are entitled under Federal law, but it is not owed to you.

 

Second, filing for bankruptcy on your own, without a licensed and experienced bankruptcy attorney assisting you, is going to drastically increase the odds that you stumble into the spectrum of one of these Federal bankruptcy criminal offenses.

 

Yes, prosecutors will have to prove that you intended fraud, etc.—but do you really want to be having that conversation?

 

Avoid bankruptcy petition preparers. These uneducated and unlicensed pseudo-professionals have a long track record of not only doing terrible work for people but also (illegally) charging as much or nearly as much as a real lawyer would.

 

Attorney Walter Metzen is a board-certified bankruptcy specialist with the specific experience you need to ensure that walking away from your debt does not also mean walking into jail.

 

The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to your best course of action in obtaining your fresh start.

 

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