Bankruptcy Fraud and Rent Skimming

The bankruptcy system, an arm of the United States District Court, is a critical component of the United States government because of the impact bankruptcy filings have on the national and local economies. Abuse of the system by an individual debtor or a professional within the system itself undermines the integrity of the system as a whole. Through abuse and corruption of the system, the effectiveness of the rehabilitation process, the system's primary function for the debtor, is reduced.



Monies defrauded from a bankruptcy never reach the pockets of those deserving creditors and investors. As these frauds occur more frequently, these creditors and investors lose faith that their interests will be protected. This can have a ripple effect in the economy through the tightening of credit, the raising of interest rates, etc.



Bankruptcy fraud is a growing national problem. The number of bankruptcies and associated bankruptcy frauds has increased every year over the last five years. During 1997 alone, bankruptcy filings registered with the U.S. Bankruptcy Court totaled 1,367,364, an all-time high for any 12-month period in its history. The increase in the number of petitions filed with the bankruptcy court has resulted in a corresponding increase in administrative activity and a lessening of the available time and resources to enforce policy, procedures, and to detect fraud by the bankruptcy court infrastructure.



Over the past decade, professionals involved in the bankruptcy system have seen a decrease in the stigma that had been attached to an individual filing for bankruptcy. Bankruptcy relief is now more widely accepted than ever before. Along with this perceived elimination of the shame attached to filing for bankruptcy, the changing economic climate in the United States has led to a significant rise in bankruptcy filings over the past decade.



The vast majority of bankruptcies filed in the United States come in the form of Chapter 7 — "Liquidation." An analysis of current FBI bankruptcy fraud investigations revealed that the most common scheme utilized in fraudulent bankruptcy filings involved the concealment of a debtor's assets. The concealment of assets encompasses approximately 70 percent of bankruptcy fraud. Concealment prevents these assets from being liquidated and transferred to his/her creditors to extinguish the debt.



While concealing assets from the bankruptcy court is a fairly self-explanatory fraud scheme, it can be accomplished in a variety of ways. A business or an individual can conceal assets. For example, an individual in Chapter 7 bankruptcy listed his/her assets as being well below his/her liabilities. While this should be the typical situation in most bankruptcy filings, the eventual outcome is not. After the debtor's bankruptcy is dismissed, he/she seems to continue living a very extravagant lifestyle. The debtors are reported by their neighbors, who claimed that the debtors concealed several assets from the bankruptcy court, to include boats, Rolex watches, and country club memberships. An investigation determined the debtors did not list these assets on their bankruptcy schedules in hopes of avoiding total liquidation of their assets.



In the case of a business filing for bankruptcy protection, concealment of assets typically occurs on a larger scale. For example, a business owner places his company in Chapter 11 bankruptcy because the company is facing a severe cash shortage. However, just prior to filing for bankruptcy, the business owner transfers large sums of cash and other company assets to family members as well as outside business interests which the owner controls. The debtor's objective was to protect these assets from sale or liquidation. Despite some notable law enforcement successes, including Operation Total Disclosure, the concealment of a debtor's assets remains the most significant problem area within bankruptcy fraud.



Bankruptcy fraud also involves schemes to include petition mills, multiple filing, false statements, trustee fraud, attorney fraud, forged filings, embezzlement, credit card fraud, and "bust-outs." After the concealment-of-assets fraud schemes, petition mills and multiple filings are the most prominent bankruptcy fraud schemes.



Petition mill fraud schemes are becoming increasingly popular in large cities with poor or immigrant populations. The scheme revolves around keeping an individual from being evicted from his dwelling, usually a person who is renting versus owning. Typically, when an individual is experiencing financial troubles, the first "creditor" to contact the distressed individual is his or her landlord. In order to avoid eviction as well as the high cost of a lawyer, the individual answers an advertisement in the newspaper or responds to a billboard or poster intentionally posted in targeted neighborhoods. The advertisement explains how a "typing service" will help them keep their homes or apartments if faced with eviction. Unbeknownst to the individual, the service files a bankruptcy on the individual's behalf. The service charges an exorbitant fee for this service and drags the process out for several months, leading the individual to believe that the company is providing them a great service. In reality, the service is stripping the individual of any savings they might have and prolonging the inevitable eviction.



The two most popular ways to perpetrate the multiple filing fraud schemes are:



through filing for bankruptcy in different states, utilizing true personal identifiers; or



using false names and/or Social Security Account Numbers (SSAN) to file in the same or different states. Typically, when a debtor files several bankruptcies in two or more states, he/she lists nearly identical assets and liabilities in each filing. The debtor becomes discharged from the debts and, in the process, makes off with several of the assets left off of a particular petition. If the debtor feels that he will be caught, he/she simply travels to another state and files for another bankruptcy.

CAPABILITIES

Enforcement of bankruptcy fraud falls within the exclusive investigative jurisdiction of the FBI. Investigations are typically the result of referrals from a number of sources, but primarily originate with the United States Bankruptcy Trustees. Many of these investigations are complex and interrelated with other forms of fraud. Due to the seriousness of this crime problem, the investigation of bankruptcy fraud remains an investigative priority within the FBI.



STRATEGY

The FBI's strategy for reducing the number of fraudulent filings concentrates on three tasks: targeting individuals and businesses who conceal assets; dismantling petition mills that prey upon poor and/or immigrant victims; and targeting individuals who make fraudulent multiple interstate bankruptcy filings.



By the FBI Economic Crimes Division----------