The new bankruptcy law, passed by Congress in 2005 (The Bankruptcy Reform and Abuse Prevention Act of 2005), was put into effect under the auspices of catching “abusive filings.” Most people would take this to mean that it was designed to catch criminals attempting to file bankruptcy. However, the practical result of the law is to deny protection to an entire swath of the honest American public.
The key addition to the new law is called the “means test.”. This test looks at the six months preceding the month in which a case is filed and “annualizes” (multiplies by two) the gross income received by the individual. This includes the income resulting from the sale and liquidation of assets like cars, motorcycles and even 401(k)’s. All this income goes into the pot and is used to force people away from Chapter 7 bankruptcy (90 days, quick and easy) and into Chapter 13 bankruptcy (5 years, low success rate).
Common criminal acts under bankruptcy statutes can involve the concealment of assets, destruction of documents, fraudulent claims, conflicts of interest, false statements, fee fixing or redistribution arrangements, and the acquisition of new debt without the intent to repay it. Falsifications on bankruptcy schedules can constitute perjury. Filing bankruptcy multiple times is not in and of itself fraud, but may create problems depending on the state of mind of the person filing.
The United States Trustee’s office was given a large budget boost under the new law. However, if the US Trustee is so busy catching “abusive” filings (i.e. those deemed to have too much money), who is looking at the actual criminals filing bankruptcy? You guessed it, no one that wasn’t looking for them before the law changed.
For those out to cheat the system, the game is the same: understate your assets and use bankruptcy as another tool to move through life the wrong way. For those honest, hard working Americans who sold everything they had to pay debts and still ended up in bankruptcy, there is a revitalized US Trustee’s office filled with accountants and paralegals hired to ferret out those deemed to be “abusing” the system.
Bankruptcy fraud can be investigated by the FBI and is punishable by up to six years in Federal prison, revocation of a discharge, and a $500k fine. It is not something to take lightly.
How to Avoid Fraud
If you are in debt and considering selling assets to repay your creditors, talk to an attorney first. Debt settlement may be an alternative to bankruptcy. However, it should only be considered after vetting competent settlement experts.
Typically, debts can be settled for 50% or less of their outstanding balance, but there is a huge risk when dealing with debt collectors on your own. Selling assets before filing bankruptcy can be a deal killer under the new law (The Bankruptcy Reform and Abuse Prevention Act of 2005). The money received counts as gross income and will be used by the US Trustee to force you to file a Chapter 13, when you may a filer that would have qualified for a Chapter 7 based on yourtheir wages. Why? Because you now “make” too much money! It’s an unfair and slanted law, but it is the one we must work within. Not disclosing the sale or transfer of an asset is fraud.
The main reason to use a debt settlement lawyer is the protection provided you in case as in which creditors claims that a payment you supposedly made in full settlement of an account was actually just a partial payment! When a lawyer has settled the debt, the next step is a law suit. A good settlement lawyer will have kept clear records of the transaction and will have an easy case in front of them. However, hiring a lawyer after you have a person has settled a debt on yourtheir own and are thenis involved in a dispute with the creditor will cost a small fortune. Attorneys avoid messy cases that they did no’t help create, unless they are being paid by the hour. Even then, there is no guarantee that the settlement documents you havea person has will hold up in court.
If settlement is not an option and bankruptcy makes the most sense, the best thing you can do is recognize the problem early and begin planning your case with an attorney. Do not wait until a creditor has sued you. Once local debt collection law firms are involved and a wage garnishment is around the corner, your chances to adequately plan for a bankruptcy disappear.