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The U.S. Trustee Program's Efforts to Prevent Bankruptcy Fraud and Abuse

Report No. 03-17
March 2003
Office of the Inspector General



Type of Fraud Scheme Fraud Indicators
  • Company with a short life
  • Well-established company with good credit recently taken over by a new group who attempts to hide the change in ownership
  • Fraudulent financial statements
  • False credit references
  • No receivables listed on schedules (cash basis operation)
  • Scheduled inventory is very low
  • Warehouse full of high volume, low cost items
  • Disproportionate liabilities to assets
  • Mainly temporary employees
  • Fake social security/taxpayer identification numbers used to obtain credit
  • Leased equipment
  • Few local creditors; unsecured debt is primarily comprised of trade creditors
  • Lulling letters to creditors (mail/wire fraud)
  • No corporate bank account or existing account has no funds· Cash paid up front to rent location
  • Same individuals involved in previous "failed companies"
  • Unusual banking activities (check kiting, bank fraud, money laundering, structured transactions)· Schedules and statement of financial affairs incomplete or not filed
  • Person unfamiliar with debtor's operations testifies at Section 341 meeting
  • Taxes not paid
  • The same attorney repeatedly represents these types of debtors
  • Recent changes of ownership/new players
  • People with no prior involvement in business have money transferred to them, both pre-petition and during bankruptcy
  • Changes in accounting or cash flow practices for no apparent business reason
  • Payment stream to a certain creditor suddenly balloons
  • Sudden decrease in inventory; sharp increase in aged receivables
  • Inventory, equipment, and machinery are sold a short time before the case is filed
  • Capital infusions of corporate officers are renamed "loans" and are paid back
  • Excessive salaries and bonuses
  • Complicated asset transfers with no purpose
  • Depleted pension funds
  • Leveraged buyouts
  • Employee contributions for health care and pension funds are diverted and converted for personal use by the debtor
  • New company is formed just prior to or immediately after the bankruptcy case is filed
  • The same attorney repeatedly represents these types of debtors
Ponzi (Investor Fraud) Scheme
  • Numerous contacts from investors/creditors about the case
  • List of creditors, schedules, and statement of financial affairs show mostly unsecured debt owed to numerous individuals
  • No prospectus or the prospectus provided is untruthful
  • Numerous complex investment vehicles, such as limited partnerships
  • Enormous management or general partnership fees to insider controlled companies
  • Monthly operating reports show income is from individuals with little or no other outside income
  • Lulling letters to investors explaining that the delay in their interest/loan/deal payment is outside the control of the manager and, if they will be patient or continue to send money, the problems will be resolved
Health Care And Welfare Fraud
  • Numerous complaints of poor or non-existent services
  • Adverse publicity by media about operations
  • Investigations by regulators of operations
  • Lack of normal books and records
  • Unlicensed shelters, rehabilitation facilities, halfway houses, etc.
  • Deductions from employee paychecks for health care coverage, but funds not remitted to the insurance company
Rent/Equity Skimming
  • Failure to make mortgage payments
  • Transfer of entire or fractional interest to property shortly before foreclosure
  • Multiple fractional interests in real property listed on the schedules
  • Frequent quit claim deeds transferring interest in the property
  • Numerous "doing business as" designations and individuals in the chain of the title
  • Use of mail drop boxes as company business addresses
  • Post petition transfers into a bankruptcy estate
  • New corporation formed holding a single asset
  • Schedules amended to dramatically increase number of pieces of real property owned by the debtor
  • Same individual files claims in large number of unrelated cases. Proofs of claim do not have supporting documentation attached
  • Debtor complains about the unusual and menacing harassment by a creditor, and counsel takes no court action against the creditor
  • Unusual provisions in cash collateral orders
  • Agreements by the debtor to modify the automatic stay to permit foreclosure without any assertion that the lender is under secured
Concealment And False Statements
  • Claims of theft or large gambling losses just before bankruptcy
  • Inability to account for property listed on insurance policies or personal financial statements in existence before bankruptcy
  • Incomplete schedules - frequent amendments in response to creditor questions
  • Unexplained change in financial circumstances
  • Debtor shows no ownership interest in residence
  • Tax returns not filed for the relevant years
  • Unsecured debt does not reconcile with assets listed, e.g., large number of medical bills, but no lawsuit listed· Failure to list prior bankruptcies· Significant amendments to list of creditors after Section 341 meeting
  • Complaints by ex-employees, ex-spouses, or ex-partners about hidden or omitted assets
  • Fifth Amendment claimed on any issue
  • Fire or other disaster occurs (of particular importance if arson is suspected)
  • Transfer of property to relatives or friends just before bankruptcy
  • Sudden appearance of loans or loan repayments to friends or relatives with little or no documentation
  • Sudden change of attorney for no apparent reason.· Debtor "confused" about his/her assets and financial affairs
Collusive Involuntary Bankruptcy
  • Debtor who is subject to a 180-day bar on refiling has an involuntary filed against him/her
  • Creditors have recently acquired the claim asserted in the involuntary
  • "Professional" creditors who reappear regularly in suspicious sounding deals
  • Same attorney is involved in the voluntary and involuntary bankruptcies
  • Creditors are "former" long-term business associates of the debtor's insider
  • Insider has filed several suspicious bankruptcy cases for corporate or partnership entities in a short period of time
Straw Buyer/Fictitious Bidder
  • Pre-existing, undisclosed relationship between the debtor and the straw buyer
  • Sale terms are structured to prefer one bidder
  • Inadequate or no effort is made to locate other purchasers. Advertising is not placed in appropriate newspapers or journals to reach potential purchasers
  • Unusually high bid-protection or break-up fees
  • High price offered, but broad terms allow the purchasers substantial set-off rights
  • Purchaser is represented by counsel with close ties to the debtor's counsel
  • Debtor interferes with potential purchasers due diligence efforts
  • Short notice requested on sale because of "emergency" situation
Serial Filers
  • Debtor has filed a high number of cases in a short period of time
  • Debtor does not disclose prior bankruptcy cases
  • Debtor uses different counsel to file each case
  • Chapter 13 cases never completed because of failure to fund plan
  • Debtor had been prohibited from filing a case pursuant to 11 U.S.C. § 109(g)
Fraudulent Petition Mills
  • Pro se petition where debtor says no one assisted him/her, but the debtor is clearly unfamiliar with the bankruptcy system
  • A pro se petition is filed and the debtor denies filing bankruptcy
  • Debtor fails to attend Section 341 meeting
  • "Face Sheet" filing with a single creditor listed, usually the mortgagee or the landlord
  • Debtor facing eviction, foreclosure, or repossession notice
  • Pattern of pro se debtors with identical paperwork as to form, style, and general content
  • Pattern of complaints from mortgagees or landlords
  • Debtors or others have been solicited by petition mills that stress stopping evictions
  • Complaints by debtor that he/she has been making rent/mortgage/car payments to a third party
  • Advertising in budget papers and using flyers to advertise bankruptcy and divorce assistance at a low, fixed fee
  • Imply that attorneys are supervising/approving the service
  • Request payment of filing fee in installments
  • Assets or liabilities are not scheduled
  • Failure to properly fill out or file schedules
  • Use of Chapter 7 when Chapter 13 is clearly feasible.