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What Happens if the Court Alleges You Committed Bankruptcy Fraud?

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The bankruptcy court takes fraud seriously and employ many consequences if it appears a petitioner is trying to abuse the system to cheat creditors out of money they are legally owed. If the trustee finds can prove you have engaged in fraud in your bankruptcy filing, here are two things that can happen.

Your Assets May Be Confiscated

Most of the time, people commit bankruptcy fraud—either accidentally or intentionally--when dealing with their assets. In many cases, the "fraud" is a result of a mishandling of asset transfers. The petitioner may sign over a vehicle to their teenage child to fulfill a promise not realizing that giving the car to their child so close to filing bankruptcy could be seen as an attempt to conceal a valuable asset, for example.

Sometimes, though, a petitioner will purposefully transfer non-exempt property into other people's names to prevent the bankruptcy trustee from liquidating those items and using the money to pay off creditors. When this occurs, the trustee will typically file a lawsuit against the recipient of the asset and force them to turn it over to the court.

If the asset can't be returned for some reason, then the petitioner would be responsible for paying the equivalent value to the court. For instance, if you gave someone a $20,000 car, you would have to write a check to the bankruptcy court for $20,000.

You are prohibited from making any asset transfers, but there is a right way to do it to avoid misunderstandings that may result in a bad outcome for your case. It's best to consult with a bankruptcy attorney for guidance on how best to handle this issue.

Your Case May Be Dismissed with Prejudice

If the fraud is particularly egregious, the court may dismiss your case with prejudice, which could limit your options for debt relief going forward. In this situation, the judge will typically prohibit you from filing another petition for a period of time, i.e. six months.

Even if you wait out the time period and file again, the judge may not let you discharge debts you had listed on the petition that was previously dismissed. If you listed a credit card on your first petition that shows up on the second one, the court may rule that you're still responsible for paying it after your case concludes even though credit card debt is normally dischargeable, for example.

This type of action is reserved for cases where it's obvious the petitioner is abusing the system and engaging in harmful behaviors to do so. If this occurs to you, it's possible to appeal the judge's decision, but you'll definitely need the help of an attorney who can help you with the process.

For assistance with your bankruptcy case, contact a local bankruptcy attorney.