Chapter 7 Bad Faith Filing and Criminal Fraud
When you file for Chapter 7 bankruptcy as an individual or as a business entity, you are expected to file for bankruptcy in good faith. In other words, whether you are filing for Chapter 7 bankruptcy as a sole proprietor or as a larger business like an LLC or a corporation, the U.S. Bankruptcy Code and bankruptcy courts need to be certain that you have filed for bankruptcy in good faith, and that you actually need the protections that a liquidation bankruptcy offers. If you do not file for bankruptcy in good faith, you could end up facing criminal fraud issues and criminal penalties. Bankruptcy crimes are a very serious matter.
What does it mean to file for bankruptcy in good faith, or alternatively, in bad faith? There is not one single definition of a bad faith bankruptcy filing, and it is important to understand what these cases can look like. In addition, you should understand that the consequences of a bad faith filing can be much more serious than the financial consequences of failing to seek bankruptcy protection in the first place. A creditor can file an adversary proceeding against you and ask that the judge deny your discharge for some or all of your debts.
What Constitutes a Chapter 7 Bad Faith Filing?
A bad faith filing can take many different forms, but typically any kind of bad faith filing involves an attempt to delay creditor collections unlawfully or to defraud creditors in some capacity. Some courts have defined bad faith as a bankruptcy filing in which a debtor has an ulterior motive (beyond bankruptcy protection). In many cases, a bad faith Chapter 7 bankruptcy filing involves a filing designed to use the automatic stay temporarily without any plans to actually go through with the bankruptcy case and to obtain a discharge (for an individual debtor) or to go through with the bankruptcy and close the business (for a business debtor).
As you may know, the automatic stay is applicable to bankruptcies filed by individuals and businesses alike, and it stops a creditor from taking any kind of additional collection action once the debtor has filed for bankruptcy. To be more specific, the automatic stay will prohibit a creditor from calling a business to collect debts, repossessing vehicles or business equipment, filing a lawsuit against the debtor, and garnishing the debtor’s income or assets. Yet any attempt to use the automatic stay without the intention of completing the bankruptcy process will likely be considered a bad faith filing. Common examples of bad faith filings include but are not limited to the following:
- Filing for bankruptcy to get the automatic stay benefits (as we discussed above) without plans to complete the bankruptcy process;
- Intentionally hides assets to prevent them from being liquidated; and/or
- Any other intentional misrepresentation of information or intent, or any intentional omission, that speaks to a bad faith bankruptcy filing.
Fraud and Penalties for a Bad Faith Bankruptcy Filing
If an individual or a business makes a bad faith bankruptcy filing, the individual or business owners could be facing criminal bankruptcy fraud charges and accompanying penalties. Bankruptcy fraud is a federal felony offense, and such charges can result in serious penalties in the event of a conviction, such as:
- Up to 5 years of imprisonment; and/or
- Fine of up to $250,000.
To be convicted of bankruptcy fraud, the federal prosecutor will need to show that the debtor “knowingly and fraudulently misrepresented a material fact,” which can include plans to take advantage of bankruptcy protections without plans to complete the case. You should never file for bankruptcy with the intention of benefiting from bankruptcy protections without aiming to go through the bankruptcy process fully and honestly.
Seek Advice from a Tampa Bankruptcy Lawyer
If you have questions or concerns about bad faith bankruptcy filings and Chapter 7 bankruptcy, you should speak with a Tampa bankruptcy lawyer today. Contact Samantha L. Dammer for more information.