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Fraud in Bankruptcy

October 24, 2022 David L. Stevens Bankruptcy


In 2021, the Federal Trade Commission (“FTC”) received 5.7 million total fraud and identity theft reports in 2021. 1.4 million of those were consumer identity theft cases. Together, $2.8 billion of losses were from imposter scams, and $392 million of losses were from consumer online shopping. Studies have shown that 4.5% of people in the United States become victims of identity fraud every year. With hackers and scammers becoming more and more inventive, fraud cases are more on the rise than ever. In fact, since 2020, fraud cases are up 70%. But what can the average consumer do if their identity is stolen, and the identity thief files bankruptcy in the victim’s name?  

Often people will first discover this fraud on checking their credit report. While repairing your credit after bankruptcy is not impossible, a debtor may have more difficulty when they were unaware of the bankruptcy in the first place. 

Fraudulently Filed Bankruptcy


You may wonder, why would an identity thief, after racking up debts in their victim’s name, then decide to use that name to declare bankruptcy. Often, this is because the thief is close to the victim. Family members account for at least 9% of identity theft in the United States. Other times bankruptcy is filed to prevent a foreclosure on a property not even owned by the victim of the identity theft, but with the victim listed as the debtor. 


The United States Department of Justice suggests taking the following steps when someone has filed a bankruptcy in your name without your permission: 

  • Contact the fraud department of the three major credit reporting agencies and tell them to flag your file with a fraud alert, including requiring creditors call you for permission before opening new accounts in your name; 
  • Order a credit report and verify for inaccuracies; 
  • File a police report at the station closest to your home, and send the report to the three credit reporting agencies, along with a cover letter detailing the situation; 
  • Contact the creditors for any accounts that have been tampered with or opened fraudulently; 
  • Write a letter about your stolen identity to the U.S. Trustee in your area 

Next, you may wish to have the bankruptcy taken off, or expunged, from your record. Taking this proactive step will allow the bankruptcy court to work with you to expunge the filing from the public record, so it never has to appear on your credit report again. To do this, you will need a bankruptcy attorney to navigate this rare but complicated  


Often, victims of identity theft will not realize their identity was stolen until it is too late. Therefore, the first step in the bankruptcy court is to file a motion to reopen the case under Federal Rules of Bankruptcy Procedure 5010. From there, courts differ on what rules are applicable, and what the standards are for actually expunging a case.  

Removing the Bankruptcy Records


The court in In re Buppelmann held a strict standard for expunging a bankruptcy. The court here handled the cases of two separate debtors. For both debtors, the court said it had the power to expunge a bankruptcy based on Section 105 of the Bankruptcy Code. This grants to the court the power to issue any order necessary or appropriate to carry out the provisions of the bankruptcy code. This is often used as a catch all provision when the court should have the power to do something, but that power is not explicitly given in the bankruptcy code. 


In Buppelman, the first debtor sent a list of his creditors to his attorney, but never gave permission to the attorney to file on the debtor’s behalf. The attorney filed anyway, and the court found that because of the existence of the creditor’s and/or agencies that may be aware of the filing, it was better to keep the filing as a part of the public record but note that the filing was a result of fraud committed by a party other than the debtor.  


The second debtor in Buppelmann had signed a petition and given it to his attorney but told his attorney he had authority to file only when the debtor was desperate. The court found that, because the debtor signed the petition and gave the attorney authority to file it on his behalf, the debtor was not entitled to any relief outside of the discharge of his debts. The court treated this debtor as if he had agreed to file the bankruptcy, because he gave the attorney the discretion to file on his behalf. 


The court in In re Whitener, on the other hand, decided that the bankruptcy courts were given the power to expunge under Section 107 of the Bankruptcy Code. Section 107 allows the court to protect a person with respect to scandalous or defamatory materials. The court reasoned that an individual may suffer damages from a fraudulent filing, and as such the court has the power to expunge those records. The court in this case did not, however, expunge the petition. The court reasoned that there was no showing that expungement was required to protect the debtor’s rights. Instead, the court entered an order declaring the debtor’s petition null and void. This had the same effect as though debtor had never filed his petition. 


The Buppelmann cases lead to a more recent case in the District of Delaware, In re Joyce. In Joyce, the court found that Section 105 of the Bankruptcy Code is the only statute that grants power to a court to completely expunge a bankruptcy. The court in Joyce found it better to declare the bankruptcy filing null and void, to better give creditors the opportunity to learn of the bankruptcy and its proceedings, including the fraud with which it was filed. 


The above cases all have one thing in common. None of them resulted in an expungement for the debtor. Instead, any of the courts that decided to grant relief to the debtor declared the petition filed fraudulently “null and void.” This had the same effect as an expungement but allowed the case to remain on the record for the purpose of granting notice to creditors. In fact, only one bankruptcy court, the District of South Carolina, has granted an expungement. In In re Storay, the court found an attorney that had filed on behalf of a married couple had failed to meet the requirements of 37 other cases within the same timeframe. Additionally, one of the debtors had compelling testimony stating that she was not present at the time the petition was signed, and the allegedly signed petition bore little resemblance to the petition actually filed. The court (citing Section 105) expunged the case as fraudulent. 


While this may all seem complicated, an experienced bankruptcy attorney can help navigate this difficult situation. Call one of our bankruptcy attorneys for a free consultation and learn about your options and the best practices during this difficult time.  



David L. Stevens

I have a passion for what I do. There are few things I enjoy more than helping good people and viable businesses find solutions to overwhelming debt.

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