BANKRUPTCY (INSOLVENCY) FRAUD

Question 1

Concealed Assets

Answer 1

The most common crime is the concealment of assets rightfully belonging to the debtor
estate.

Question 2

The Planned Bustout

Answer 2

A bustout is a planned bankruptcy

Question 3

Bustout schemes are planned and perpetrated by individuals both prior and subsequent to
the formation of the new business entity. Other characteristics of bustout schemes include:

Answer 3

• They are planned from the beginning.
• Sometimes organized crime is involved.
• Credit is established with numerous vendors; prompt payments are made to all vendors;
vendors feel comfortable in dealings, thereby extending existing credit lines.
• Perpetrators build inventory by ordering everything they can from vendors; they promise
to pay soon and order more merchandise.
• Sell out inventory at deep discount or move it before vendors can take possession of it. • Business fails or closes up, files bankruptcy, or creditors beat them to it with involuntary
bankruptcy.

Question 4

Some red flags that signal a bustout scheme might be in process include:

Answer 4

• A business relationship based principally on trust. Creditors are willing to offer extended
terms for payment, hold cheques, or take post-dated cheques. This makes them
vulnerable.
• Buyers with a history of purchasing goods for an unreasonable discount.
• A large number of bank accounts, indicating a possible kiting scheme. The perpetrator
occasionally pays some of his creditors with funds generated by floating cheques
between bank accounts.

Question 5

Prevention

Answer 5

Lenders and suppliers should evaluate potential customers carefully prior to extending credit.
Evaluations should include performing due diligence and obtaining detailed background
information. Lenders and suppliers should at times visit their customers’ locations to verify
the legitimacy of the businesses.

Question 6

Multiple Filings

Answer 6

This scheme involves repeated bankruptcy filings by the same debtor in order to obtain the
benefit of the automatic stay. Usually each petition is dismissed for failure to file the required
statements or to appear for examination. False statements on petitions are common,
including a denial that the debtor has filed any previous petition.

Question 7

Credit Card Bustout

Answer 7

The debtor intentionally runs up a number of credit cards to their limit and files bankruptcy
with no intent to repay. Credit card debts might include purchases for jewellery, luxury
items, or other personal property which are not disclosed on the schedules. Credit card debt
also might include large cash advances taken prior to filing bankruptcy.

Question 8

Forged Filings

Answer 8

Bankruptcy petitions sometimes are filed in another (uninvolved) person’s name, usually as
part of a larger scheme using an assumed identity. It can take years to correct the credit
records of the person whose identity has been stolen. Sometimes the debtor’s name is
obtained from obituary notices.

Question 9

Typing Services or Petition Mills

Answer 9

This scheme involves companies that file bankruptcy petitions typically on behalf of low-
income, and often, unsuspecting clients. The petitions often contain numerous false
statements. The debtor often has no idea a bankruptcy has been filed, as the service has held
itself out to be a renter’s rights group and has not told the client how it will accomplish what
it has promised.

Question 10

The World Bank Principles for Effective Insolvency and Creditor Rights Systems embody several fundamental propositions,
including:

Answer 10

• Effective systems respond to national needs and problems. These systems must be rooted in the
country’s broader cultural, economic, legal, and social context.
• Transparency, accountability, and predictability are fundamental to sound credit relationships. Capital
and credit, in their myriad forms, are the lifeblood of modern commerce. Investment
and availability of credit are predicated on both perceptions and the reality of risks.
Competition in credit delivery is handicapped by lack of access to accurate information
on credit risk and by unpredictable legal mechanisms for debt enforcement, recovery,
and restructuring.
• Legal and institutional mechanisms must align incentives and disincentives across a broad spectrum of
market-based systems—commercial, corporate, financial, and social. This calls for an integrated
approach to reform, taking into account a wide range of laws and policies in the design
of insolvency and creditor rights systems.