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Bankruptcy Fraud

What is Bankruptcy Fraud? Understanding Bankruptcy Laws and the Criminal Code Of Canada

Most of us at sometime in our life have experienced setbacks that put us in a financially difficult situation. Whether it’s a loss of our job, injury, illness, or a divorce – it may seem impossible to cover our bills. In some scenarios, filing for Bankruptcy may be the best option.

While most people that file for Bankruptcy are honest, a few are not. Some will try to use Bankruptcy to defraud their creditors. They do this to fund a lifestyle for themselves that they can’t afford. This is bankruptcy fraud.

Bankruptcy fraud is taken very seriously by Licensed Insolvency Trustees (LITs), the Office of the Superintendent of Bankruptcy (OSB), and the Royal Canadian Mounted Police (RCMP). Some incidents of Bankruptcy fraud are so severe they can result in jail time.

What is Bankruptcy Fraud?

Most people who commit fraud usually plan to do so before they start the Bankruptcy process. They acquire credit for the purposes of going bankrupt – opening and using credit accounts knowing they will declare Bankruptcy. Some may misrepresent their financial position to their Licensed Insolvency Trustee, sometimes obtaining credit fraudulently. These are all prohibited by Bankruptcy laws and if caught can be subject to various penalties, including those defined by the Criminal Code of Canada.

Bankruptcy Fraud and Abuse

Financial stress can be overwhelming. If you file for Bankruptcy, it’s possible to give your LIT information that may not be accurate in error. Honest mistakes aren’t fraud, and your LIT will help you with the process to ensure everything is processed correctly.

There are some, though, who intend to use Bankruptcy as a means to enrich themselves and defraud others. They may obtain credit under false pretenses and use it to fund a lifestyle they can’t afford or buy assets they intend to hide.

Bankruptcy fraud intentionally presents misleading information to creditors, to the LIT, and, ultimately, the court. Some common types of bankruptcy fraud are:

  • Misrepresenting financial situations to get credit, including overstating income, not disclosing debts, or providing false documents to the creditor.
  • Buying things or obtaining cash advances intending to go bankrupt.
  • Disposing of assets before or after Bankruptcy in a fraudulent manner.
  • Engaging in trade or getting additional credit without letting those involved know they’re bankrupt.
  • Falsifying, destroying, or hiding documents that relate to their affairs or property.
  • Making false entries into statements of accounts.
  • Concealing outstanding debts, claims, or property.
  • Removing property fraudulently.
  • Refusing to provide truthful answers to questions asked in accordance with the Bankruptcy and Insolvency Act.

How is Bankruptcy Fraud Discovered?

Licensed Insolvency Trustees and the Office of the Superintendent of Bankruptcy (OSB) can identify irregularities in Bankruptcy proceedings. As a result, they are very skilled in determining if a claim is fraudulent.

The OSB identifies Bankruptcy fraud in one of two ways. First, the OSB has Bankruptcy Fraud detection programs. These programs help identify possible Bankruptcy fraud cases. The other way the OSB identifies potential cases is by complaints made by LITs, creditors, or members of the public who know the situation. Members of the public can include family members, colleagues, or neighbours.

When there is sufficient cause to suspect Bankruptcy abuse or fraud, the OSB will refer the case to one of their three special investigation units. Depending on their findings, they may refer the matter to the RCMP, since the two work closely together. While Bankruptcy fraud is considered a white-collar crime, it can be severe enough to warrant penalties that fall under the Criminal Code of Canada.

What are the Penalties for Bankruptcy Fraud?

Penalties vary depending on the case. A person guilty of Bankruptcy fraud can be subject to fines, a prison term, not qualifying for an automatic discharge of their Bankruptcy, or a combination of these. If you have financial problems in the future, a conviction for Bankruptcy fraud may make it hard for you to qualify for a Bankruptcy or Consumer Proposal.

Work With Your Licensed Insolvency Trustee

The vast majority of people who declare Bankruptcy are honest. However, they’ve fallen on hard times and need help. LITs have the training to provide you with all debt relief options including Bankruptcy. They will  make the process as easy as possible for you. As a client, you can do several things to make sure your case is processed efficiently and your claim will not prompt an investigation for fraud.

The first is to fully cooperate and deal honestly with your LIT. Bankruptcy laws require LITs to provide sworn statements of your affairs. Make sure you have fully disclosed everything and answer any questions to the best of your knowledge.

Provide your LIT with any documents required. Your documents will provide proof of your claims which will support your case.

Disclose any assets you may have transferred to someone else, sold, or put elsewhere. Your LIT needs to know about any transfers of assets you have made so they know you’re not trying to hide anything.

If you are doing business with others and need to borrow more than $1,000, you must tell them you are bankrupt. Hiding this information from potential creditors can be considered fraud.

Finding the Right Professionals

Bankruptcy abuse and fraud are uncommon but do occur. Checks and balances are built into the process to detect this type of financial fraud. Most people seeking financial relief through a Consumer Proposal or Bankruptcy have fallen on hard times, and these options are there to help them start over.

If you feel overwhelmed by your debts and want further information, don’t hesitate to contact Adamson and Associates at 519-310-5646 for a free consultation.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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