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What is Bankruptcy Fraud?

What is Bankruptcy Fraud?

The NRA’S recent bankruptcy filing was as controversial as the organization itself. The non-profit is believed to have filed to get out of being dissolved by New York regulators over allegations of corruption and mismanagement, even though it was fully solvent at the time. The bankruptcy filing was so unusual that new york senators suggested the department of justice should investigate the organization for bankruptcy fraud. So what is bankruptcy fraud and how did the NRA manage to file for bankruptcy when it was not even insolvent?

At the time of the bankruptcy filing, New York State AG Laetitia James had sued the NRA for mismanagement and corruption. The President of the NRA, Wayne LaPierre, and other high ranking executives were alleged to have mispent funds on lavish lifestyles, including chartered private jets. La Pierre’s assistant was kept on even after she diverted funds from the NRA. 

In an apparent attempt to get out from under the thumb of New York regulators, where the NRA has been incorporated for 100 years, the organization filed for Chapter 11 bankruptcy. The NRA hoped to re-organize in Texas. This audacious gambit was called “shocking” in court. The NRA stated openly that the bankruptcy case was pursued as a way for the NRA to re-organize, and that the NRA was financially solvent at the time it filed for bankruptcy. 

So does this mean bankruptcy is a legitimate way to dissolve and restructure any company for any reason? Bankruptcy fraud is taken extremely seriously, and it can be brought for any dishonesty or concealment of assets surrounding the filing. Any individual or company filing for bankruptcy is under obligation by the law to file “in good faith.” This means the filing MUST be made for the intended purposes of restructuring the finances of an insolvent company (or individual), and not to gain advantage. 

If a bankruptcy filing is dismissed for not following this protocol, it can be dismissed either with or without prejudice. The NRA’s bankruptcy case was dismissed “without prejudice,” and found to be improper, not filed in good faith but not specifically “in bad faith.” If a bankruptcy case is dismissed “with prejudice,” this can restrict the ability to file again within a certain period and it also demonstrates that the bankruptcy court or trustee believes there is reason to believe the company or individual may have been dishonest in the filing and there may be bankruptcy fraud. Often when bankruptcy is dismissed “with prejudice,” a trustee has been appointed to handle the company’s affairs. A trustee was not appointed in the case of the NRA and the case was dismissed “without prejudice.” However the judge wrote that if the NRA were to refile the case, he would address “concerns about disclosure, transparency, secrecy, conflicts of interest” between NRA officials and their bankruptcy legal team.” A bankruptcy filing must follow legal procedure and be transparent. LaPierre apparently had not shared his bankruptcy plans with the board of the NRA, leading to suspicions of secrecy and dishonesty. 

The NRA was open that one reason for filing was to re-organize to avoid the fate of dissolution by New York state regulators. A spokesperson for the NRA emphasized that the NRA had been honest that they were solvent during the case and had not done anything wrong. According to this logic, the NRA cannot be accused of dishonestly claiming insolvency, even if their filing was used to gain litigation advantage. The organization has also used the trial as a way to disclose details of the NRA’s attempts at reform. Again, according to their logic, the organization’s clean-up operation shows that the New York regulators don’t have ground to pursue their action against corruption in the organization.

The NRA are a powerful organization, who have so far avoided consequences for a highly unusual filing. Most individuals and companies will not be so lucky. There are many reasons why bankruptcy fraud is charged, including shielding assets from the process, misrepresenting information and not disclosing assets or information. There are 6 types of bankruptcies in the US. Chapter 11 bankruptcy is the most common type of bankruptcy filed by companies, but it can also be filed by individuals with debts exceeding a certain amount.

Bankruptcy fraud can be either civil or criminal bankruptcy fraud. Sometimes in desperation or for personal gain, people try to subvert the bankruptcy process or shield assets. If you are facing civil bankruptcy fraud the trustee may decide to remove bankruptcy protections such as exemptions for assets that are protected against creditors. If you are charged with criminal bankruptcy fraud you can face imprisonment and a fine which is non dischargeable in bankruptcy. Thus, if bankruptcy fraud is proved you may find yourself in an even worse financial situation than before.

Criminal bankruptcy fraud is a felony and can carry:

  • Up to 5 years in prison
  • Several years of probation
  • A fine of up to 250,000 
  • Restitution 

Bankruptcy fraud always involves intent, and this must be proved. If criminal bankruptcy fraud is intentional, it may be charged along with a number of other serious crimes such as perjury, wire fraud, bank fraud and tax fraud. Facing bankruptcy fraud could mean facing a host of charges that would result in long-term imprisonment and excessive fines. 

Criminal bankruptcy fraud involves complex circumstances, and must be proved beyond reasonable doubt. With a skilled Boston bankruptcy fraud attorney by your side it can often be shown that the unique circumstances of your case do not merit the most serious punishments. You should never go it alone when facing a serious charge like bankruptcy fraud. The financial consequences alone can have a serious impact on your life, especially if you are already struggling with debts. At Dhar Law, LLP, we bring our exhaustive experience and hard-hitting defense to every case and will start building your defense as soon as possible. Please don’t hesitate to contact us to see how we can help.

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Image provided by: Bankruptcy fraud by Nick Youngson CC BY-SA 3.0 Pix4free


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