Bankruptcy exists to give honest debtors a chance to rebuild their financial lives without the crushing weight of overwhelming debt. For most individuals who file, the bankruptcy process is a lifeline—an opportunity to start fresh, reorganize finances, and obtain relief from collection efforts. The bankruptcy system, however, relies on transparency and honesty. When a debtor or creditor abuses the system, the consequences can be severe. Bankruptcy fraud undermines the purpose of the Bankruptcy Code and carries serious civil and even criminal penalties.
Although the term “fraud” is often used casually, it has a specific and important meaning in bankruptcy. In fact, fraud appears in the bankruptcy process in two major ways:
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Debts incurred by fraud – situations where the debtor obtained money, goods, or services through fraudulent conduct and then seeks to discharge those debts in bankruptcy.
- Fraud committed during the bankruptcy case itself – fraudulent statements, omissions, or intentional misuse of the bankruptcy system.
In this comprehensive guide, we’ll explore what bankruptcy fraud is, the warning signs, how courts handle fraudulent conduct, the difference between civil and criminal penalties, and what debtors and creditors need to know to protect themselves.
Debts Incurred by Fraud
Debts that were incurred by fraud are non-dischargeable. These are situations where the debtor engaged in fraudulent behavior before filing the bankruptcy petition. The creditor would claim that the debtor lied, deceived, or misled the creditor to obtain money, property, or services.
What is a Fraud as a Legal Cause of Action?
Fraud generally includes the following elements:
- Misrepresentation of a Material Fact – A person makes a false statement about something important.
- Knowledge of the Falsehood – The person knows the statement is false or acts with reckless disregard for whether it is true.
- Intent to Induce Reliance – The person intends for someone else to rely on the false statement.
- Reasonable Reliance – The victim reasonably believes the statement and relies on it.
- Damages – The victim suffers financial harm as a result.
In simpler terms, fraud occurs when someone lies, another person believes the lie, and money or property is lost as a result.
Examples include:
- Taking out a loan using false income information
- Borrowing money with no intent to pay it back
- Using stolen or fake identification to open accounts
- Purchasing goods with the intention of filing bankruptcy immediately afterward
When a debtor later files bankruptcy, the creditor can argue that the resulting debt should not be discharged.
Process for Determining the Debt is Non-Dischargeable
A creditor does not automatically win just because they allege fraud. Even if the creditor believes fraud occurred, they must take formal legal action to prove it. In bankruptcy, that action is the filing of an adversary proceeding.
An adversary proceeding is essentially a lawsuit within the bankruptcy case. The creditor must file it within 60 days after the meeting of creditors (341 meeting). Missing this deadline usually means the creditor loses their rights, and the debt will be discharged.
In the adversary proceeding, the creditor presents evidence, and the debtor has an opportunity to defend themselves. The bankruptcy judge then determines whether the debt was incurred by fraud and, therefore, non-dischargeable.
Common examples of debts found to be non-dischargeable due to fraud:
- Credit card charges for luxury items made shortly before filing
- Cash advances taken days or weeks before the bankruptcy
- Loans obtained with forged or falsified applications
- Debts arising from embezzlement or theft
- Debts based on intentional misrepresentations
If the court finds in favor of the creditor, the debt survives the bankruptcy. If not, it is discharged like any other unsecured debt.
Debtor’s Fraud in Filing for Bankruptcy
Bankruptcy fraud occurs when a debtor intentionally lies, conceals information, or engages in improper conduct to gain an advantage in a bankruptcy case. Common examples include hiding assets, falsifying documents, transferring property to friends or relatives before filing, or deliberately running up debt with no intention to pay it back.
Fraud can result in harsh consequences such as dismissal of the case, denial of discharge, monetary sanctions, or, in severe cases, criminal prosecution by federal authorities.
Examples of Fraud in Bankruptcy
Because the Bankruptcy Code balances debtor relief with accountability, courts take even small misrepresentations seriously. Whether intentional or accidental, inaccuracies can trigger investigations, hearings, and objections. But when conduct crosses the line into intentional deception, the consequences can be life-altering. It is important to be sure all of the information in the bankruptcy petition is as accurate as possible.
Common examples of bankruptcy fraud include:
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Concealing Assets - Debtors may try to hide real estate, vehicles, cryptocurrency, business interests, or even cash. Courts treat asset concealment as one of the most serious offenses.
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Undervaluing Property - Listing a $10,000 vehicle as worth $1,000 is not simply a mistake—it may be treated as intentional deception.
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Omitting Income - Failing to disclose side jobs, gig work, rental income, or cash earnings is fraud.
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Transferring Property to Friends or Family - Transferring assets for $1 or “gifting” them before filing is a major red flag.
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Misusing the Automatic Stay - Filing bankruptcy solely to stop foreclosure or repossession—when the debtor has no intention of completing the case—can be considered abuse of the system.
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Repeated Filings - A debtor filing multiple times within a short amount of time is an issue where the debtor is seeking to prevent collections on specific debts.
Consequences of Filing a Fraudulent Bankruptcy
If a court does determine that a debtor fraudulently filed, the debtor can face severe penalties. These include:
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Dismissal of the Case - The case may be dismissed with or without prejudice, meaning the debtor may have to wait months or years before refiling.
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Denial of Discharge - Even if the case moves forward, the debtor may lose the ability to discharge any debts.
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Loss of Exemptions - If the court determines the debtor acted in bad faith, certain exemptions may be denied.
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Civil Fines - The court may impose monetary penalties.
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Criminal Charges - The U.S. Department of Justice may prosecute bankruptcy fraud as a federal crime with possible penalties including 5 years in prison, fines of up to $250,000, and/or restitution orders. Criminal bankruptcy fraud cases often involve more than one type of misconduct—such as concealment of assets coupled with false statements on schedules.
If a court discovers the fraud after the discharge has already been granted, the court may revoke the discharge.
While a person cannot accidentally commit fraud, it is extremely important to make sure all of the information in the bankruptcy petition is as accurate as possible. Even if there was an accidental omission, it would still require the trustee to investigate the omission leading to a delay in the case and discharge. If the trustee determines the omission was intentional, they must bring it to the attention of the court.
Whether you are a creditor seeking to determine a debt as non-dischargeable, or a debtor attempting to re-file a bankruptcy case, it is important to have experienced, knowledgeable legal counsel on your side. Call the Scura law firm today for a free consultation.