Most Canadians filing for bankruptcy are honest individuals who are experiencing serious financial problems. Unexpected personal crises like unemployment, health problems, and divorce are common reasons for declaring bankruptcy. However, there are those who plan a future bankruptcy in order to buy things they can’t afford or obtain credit they do not intend to repay. This is known as bankruptcy fraud, and it’s a crime.
What is Bankruptcy Fraud?
Bankruptcy fraud can take several forms, but they all have one thing in common—purchasing items or services with the intent to file bankruptcy instead of making repayment.
Common forms of fraud include:
- Living extravagantly and well beyond your means, gambling, or major mismanagement of personal finances
- Continuing to borrow or trade after you know you can’t afford to repay the debts
- Making fraudulent statements to receive something of value
- Creating or presenting fraudulent documents in order to obtain a loan or receive something valuable
- Giving payment preference to one creditor, even when all debts were unaffordable
- Writing bad checks in order to kite funds and juggle payments
How is bankruptcy fraud revealed?
Bankruptcy has built in checks designed to spot fraud. Licensed insolvency trustees are required to ask for sworn statements regarding your income, expenses, and windfalls like winning the lottery or receiving a cash gift. They also discuss your current financial status and past spending.
For example, if you used credit to purchase $10,000 worth of designer clothes, shoes, and purses a short time before filing bankruptcy, your trustee will suspect fraud. A home sale often raises a red flag if the sale occurred soon before or after bankruptcy.
Neighbors and family can also report fraudulent behavior they observe. Creditors, banks, and casinos report these kinds of activities to the authorities on a regular basis. Suspected bankruptcy fraud can be reported on the website maintained by the Office of the Superintendent of Bankruptcy (OSB). All reports are investigated by the OSB and the Royal Canadian Mounted Police (RCMP). If there is sufficient evidence, an arrest usually follows.
What happens if you’re found guilty of fraud?
Bankruptcy fraud is a serious offense and penalties vary. Most often, purchases or profits are not included in the bankruptcy. You will be required to pay for purchases or refund the profits related to your fraudulent activities. If you are convicted, your bankruptcy will be reviewed and you will no longer qualify for an automatic discharge. A consumer proposal or bankruptcy may be difficult or impossible to obtain in the future.
Several fines are charged and jail time can also be part of the penalty.
Many who attempt bankruptcy fraud schemes believe they will be able to pull off their plan. However, the OSB and licensed insolvency trustees are very good at spotting fraud. Most people who file for bankruptcy are honest debtors who have fallen on difficult financial times. If you are considering bankruptcy, consult a trustee to make sure any transactions you make are allowed within the laws of bankruptcy.
So, when declaring bankruptcy in Canada, first consult a financial expert who can let you know how to properly file for bankruptcy.