Do Your Part to Prevent Fraud in Bankruptcy Filings

— by Victoria Ring, Colorado Bankruptcy Training

In the old days (not long ago) when a person decided to file bankruptcy they normally really needed to file bankruptcy.  But today, a large number of cases are filed with the fraudulent intention of taking advantage of the bankruptcy system and it is up to every one of us working in this field to do our part to protect the system or we risk even more regulations and hoops to jump through.

The best way to accomplish this goal is to demand that debtors provide verifiable documentation about their income for the past six months.  During the last month I have witnessed four cases involving debtors who claim to work as a 1099 employee but they have no verification of income and expenses to back up their statements.  When confronted for additional data, normally the debtor (who is trying to hide something) will give the attorney and their staff conflicting stories.

One attorney we helped this past week told us that the debtor had given him 100 different stories.  The attorney wanted us to call the debtor and see if we could get the truth.  First of all the debtor would not answer the phone and gave the excuse that he avoided phone calls because of credit collectors.  Note:  Don’t fall for this. The debtor knew he was filing bankruptcy and that his attorney will need to get in touch with him during the process.  In my experience, debtors avoid phone calls because they: (1) Are too paranoid to face their problems and want to forget about them; or (2) They are hiding something and need time to think up a good excuse.  (Please understand that I am not trying to be harsh.  I am just stating facts.)

In all case scenarios we worked on this past week, the debtors were required to provide six months of income statements.  Of course 1099-employees do not receive a paycheck from an employer, but they must have some type of accounting system to show the income and expenses for their business.  If they do not, something is odd.   Keep in mind, that some debtors will tell you that they do not keep records to avoid providing you with information about their actual income, so you need to go a step further.  You need to get the debtors to provide you with a Profit and Loss statement for their business, regardless of whether they have one or not.  They can write one up and provide to their attorney.  And the income figures the debtors provide need to match the bank deposits from their business and personal checking accounts.  If not, creditor objections are very probable.

That’s right.  You need BOTH the business and personal checking account statements for the past six (6) months; and if you want to go an extra step, compare the figures with the IRS Income Taxes that were filed the year before.  Of course these figures may not be exact, but comparing them will often allow you to determine if the debtor is providing you with fraudulent data in an effort to hide their income.  For example:  If the IRS Tax Forms that were filed in 2009 showed a loss of $20,000, and the 2010 bank statements show the debtors are depositing $5,000 a month; something is wrong.  A business does not normally operate an entire year, go in the red $20,000 and suddenly make $5,000 every month.

Use logic in your analysis of the data the debtor provides whether you are an attorney or working for an attorney.  Doing so will protect the attorney, fulfill due diligence and protect the system from fraudulent debtors.

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One Response to “Do Your Part to Prevent Fraud in Bankruptcy Filings”

  • I agree and would add the need for spousal income. My recent experience is a client that claimed to be separated from his spouse and a claim that he was just demoted and lost over $400 a month income. Most recent advice proved this.
    Found out from spouse after a routine phone call that the demotion was temporary and they were not separated. When her income was calculated they were way over the means test limit. Problem was we were already filed.