Sometimes I get questions from potential clients who want to hide assets from their creditors. “What if I just transfer it to my wife?” Is a common question. Short answer: you can’t do that. But what happens if you do?
At best, you’ll get caught and you won’t be allowed to discharge any debts in bankruptcy. At worst, you’ll end up in federal prison. Just consider the case of Ronald and Mary Arthur. In that case, USA v. Arthur, the Seventh Circuit Court of Appeals found that even where the debtor had filed a “legal separation” from his wife and transferred assets after the separation agreement, the transfers bore many “badges of fraud” and allowed the charges of bankruptcy fraud to go to the jury, who convicted Mary of bankruptcy fraud under 18 U.S.C. § 152(5), which says that a person who “knowingly and fraudulently receives any material amount of property from a debtor after the filing of a case under title 11, with intent to defeat the provisions of title 11; shall be fined under this title, imprisoned not more than 5 years, or both.”
18 U.S.C. § 152(5) is interesting because most bankruptcy fraud statutes are aimed a the bad conduct of debtors in bankruptcy, but this particular section deals with any “person” who fraudulently receives property from the debtor. So if you’re thinking about transferring property to your spouse during a bankruptcy, you may want to reconsider, because you could be sending them to jail.
Another way to land in jail for your conduct in someone else’s bankruptcy proceeding is by filing a fraudulent proof of claim. For instance, let’s say your buddy owes you $10,000 and has $100,000 of unsecured debt, but only has $20,000 of nonexempt assets. This means that if he files Chapter 13, each creditor stands to get roughly 20% of their debt repaid through his Chapter 13 plan. Your buddy decides that he’d rather pay you than, say Citibank, so he tells you to be sure to file your proof of claim in his case and that he’ll agree to list his debt to you at $20,000 instead of the $10,000 that he legitimately owes. That means that instead of receiving $2,000 for your $10,000 debt, you’ll be set to receive about $3,600, because you inflated your proof of claim. THIS IS ILLEGAL. 18 U.S.C. § 152(4) deems it a felony for a person to “knowingly and fraudulently present any false proof of claim against the estate of a debtor, or uses any such claim in any case.”
Similarly, even if you don’t get anything out of it, you can be prosecuting merely for fraudulently concealing or destroying “any recorded information (including books, documents, records, and papers_ relating to the property or financial affairs of a debtor.” 18 U.S.C. § 152(8). So if you’re a bookkeeper and your boss or client facing (or amidst) bankruptcy tells you to destroy any documents, you may want to think twice before you do it.
So how do you avoid all of these potential land mines? Be honest. Go with your gut. If something sneaky is afoot, you want no part of it. If you have a question about the conduct of someone who is in bankruptcy, feel free to call our office for a consultation at 251.272.9148.