The upsurge in bankruptcy filings is unsurprising given the severe economic downturn and the slow pace of recovery. With predictably, and the high rate of bankruptcy filings, comes another trend – a sharp and prolonged spike in bankruptcy fraud. Bankruptcy fraud ranges from simple issues, such as failing to declare assets on bankruptcy schedules to more complex issues, such as rent/equity skimming. It takes experience, time, and determination to investigate even the simplest-seeming asset concealments.
METHODS OF CONCEALMENT
Detecting bankruptcy fraud can be a challenge for trustees and creditor committees. Frequently, the “red flags” are hidden in thousands of pages of business records and complex relationships. Since financial information and relationships are so closely related, a “relationship map” can indicate when vendors are insiders and have potentially worked with the debtor to manipulate records in order to be paid first. Insufficient information can be a sign that something has been concealed.
CONCEALMENT OF ASSETS
Most bankruptcy fraud involves concealment of assets. In the most basic form of concealment of assets, a borrower simply fails to list assets (i.e., real estate, artwork) on the bankruptcy schedule. In a more complicated fraud scheme, a borrower transfers assets to associates or relatives so that the assets cannot be repossessed.
TRACING PREFERENTIAL PAYMENTS
Preferential payments are a somewhat more subtle method of asset concealment that is harder to identify. Basically, a preferential payment takes place if a borrower makes a payment to a creditor, in which a creditor collects more than he or she would have received in the bankruptcy distribution. Other potential preferential payments include payments of loans to related individuals or payment of loans that may have been personally guaranteed.
The Bankruptcy Code also allows the trustee to avoid a fraudulent conveyance – a move similar to a preferential payment that involves the transfer (conveyance) of title to real property and/or other assets for the express purpose of putting it beyond the reach of a recognized creditor. Laws regarding fraudulent conveyances also apply to transactions in which the debtor did not receive reasonably equivalent value for the transfer of assets.
BUSTOUT: This occurs when a company receives “goods” from creditors and sells those goods for cash with the intention of never repaying them. Some red flags are fraudulent financial statements, low inventory levels, and false credit references.
BLEEDOUT: This occurs when a company releases assets over a lengthy period of time by shifting them to insiders.
CONTACT HSNO TODAY
As credentialed forensic accountants, we play a vital role in dealing with confusing fraud schemes. After reviewing records involved in the bankruptcy filing, we help our clients through the next steps. We also understand how to work with attorneys, how to deal with confidential information, how to develop and present evidence, and how to give testimony that reinforces the case. Contact HSNO today for more information on how we can assist in your bankruptcy filing case.