What Happens When a Bankruptcy Trustee Suspects Fraud?

When a Bankruptcy Trustee Suspects Fraud

Bankruptcy fraud is a serious offense that could carry a hefty fine and years of imprisonment. Because the bankruptcy code is intertwined with federal regulations any fraud committed is considered a serious matter.  A bankruptcy trustee who suspects fraud is obligated to bring the matter before the court, but with sufficient evidence.  Evidence related to potential fraud includes a variety of topics including who is committing the fraud and the activity defining the type of fraud being committed.

When fraud is suspected Rule 2004 examination may be requested.  This examines the situation by reviewing actions, property, liabilities and other matters related to the debtor.  This also includes reviewing any matters that may affect the bankruptcy estate of the debtor including the right to obtain a discharge.

An adversary hearing could be filed by the bankruptcy trustee in court to review their evidence of possible fraud.  This could be pursued against the debtor or creditor. An adversary proceeding could be used to recover property that was transferred to another party fraudulently, obtain hidden or undisclosed property or obtain a turnover order to revoke discharge of a debtor who tried to hide assets or retrieve property that was wrongfully taken during a business-related bankruptcy.

Depending on the situation a temporary injunction could be set in place that would prohibit assets from exchanging with another party during the bankruptcy.  This may also be done to help keep assets in question in place until the adversary hearing is completed.  When the suspected fraud is defined as a bankruptcy or federal crime, other agencies are alerted of the situation such as the United States Attorney or Federal Bureau of Investigation for further action.

Examples of bankruptcy crimes subject to 5 years prison and punishable fines include embezzlement, filing false petitions, making false oaths in court and concealing assets.