What is bankruptcy fraud?

Posted on 10 August 2023

Written by Alan Spergel

Many of us will face financial hardship at some point in our lives for a variety of reasons including job loss or unexpected medical bills. In some cases, bankruptcy may be the best option for resolving the situation. Bankruptcy is the legal process of gaining a fresh financial start when overwhelmed by debt. An individual assigns any non-exempt assets they may have over to their Licensed Insolvency Trustee in exchange for the clearance of their unsecured debts. Although for many Canadians, it serves the purpose of allowing them to discharge their debts and regain control of their finances, the system can still occasionally be abused. Bankruptcy fraud can challenge the integrity of the bankruptcy system in Canada, and lead to financial loss for creditors. It can also encourage scepticism over legitimate bankruptcies that are filed. In this article, we explore what bankruptcy fraud is, and the consequences in Canada.

What is bankruptcy fraud?

Bankruptcy fraud can take a number of different forms, but all include being dishonest in some capacity when dealing with creditors and your Licensed Insolvency Trustee. Most people who commit fraud will usually intend to do so before starting the bankruptcy process. Most often, this takes the shape of obtaining credit in order to go bankrupt. Some may be dishonest about their financial circumstances to their Licensed Insolvency Trustee, or gain credit fraudulently. Here are some of the most common forms of bankruptcy fraud:

  • Being dishonest about your property before or after filing bankruptcy
  • Not being truthful about all questions when being examined in line with the Bankruptcy and Insolvency Act
  • Deliberately missing off assets from your Statement of Affairs
  • Hiding any information from documents regarding your bankruptcy when filing
  • Sharing fraudulent documents in order to obtain assets or credit
  • Buying items with the intention of going bankrupt
  • Fraudulently hiding or removing any property worth $50 or more due to any bankruptcy debts
  • Disposing of any property that you have gained on credit and not paid for
  • Making false entries in statements of accounts
  • Removing property fraudulently
  • Filing bankruptcy multiple times in different jurisdictions under false identities
  • Bribing insiders to manipulate the bankruptcy proceedings in their favour

Each of these scenarios are illegal by bankruptcy law. If an individual is caught in any of these situations, they can face penalties in line with those of the Criminal Code of Canada.

How is bankruptcy fraud found out?

Filing bankruptcy has a number of checks throughout the process that are set up intentionally to identify potential fraud. Here are a few of the checks that take place:

  • Licensed Insolvency Trustees have to ask for sworn statements on your affairs. This includes information like your income, expenses, and your debts. You will also need to share details of any assets that you might have disposed of or sold. Individuals filing bankruptcy must answer all questions honestly, and must sign a sworn document called a Statement of Affairs. There is nothing wrong necessarily in transferring assets – you just need to ensure you tell your Licensed Insolvency Trustee about it
  • Family and peers might also report any fraudulent behaviour they identify.
  • Creditors and financial institutions frequently report suspicious behaviour to the authorities.
  • Members of the public suspecting bankruptcy fraud can report it to the Office of the Superintendent of Bankruptcy (OSB). Any reports are investigated by the OSB and the Royal Canadian Mounted Police (RCMP).
  • The OSB has bankruptcy fraud detection programs to identify possible fraud cases

When there is enough rationale to suspect bankruptcy fraud, the OSB will refer the case to a special investigation units. It could be referred to the RCMP. Often, fraud is serious enough to bring about penalties in line with the Criminal Code of Canada.

What happens if you are found guilty of bankruptcy fraud?

Bankruptcy fraud is a serious offence, and penalties will vary depending on what has happened. In the majority of cases, purchases or profits are not declared when filing bankruptcy. In this instance, you would need to pay for purchases, or refund the profits that have been fraudulently omitted. If you are convicted, your bankruptcy will be review and you will no longer receive an automatic discharge. If you are found guilty of bankruptcy fraud, you might face:

  • fines
  • restitution orders
  • a prison term
  • disqualification for an automatic discharge from bankruptcy
  • difficulty qualifying for a bankruptcy or consumer proposal in the future

Although individuals that try to commit bankruptcy fraud think they will get away with it, the OSB and your Licensed Insolvency Trustee are trained professionals in spotting fraud. For this reason, it is best to be completely transparent about your financial situation in order to get the support you need without consequences.

How can a Licensed Insolvency Trustee help you?

Most Canadians that file bankruptcy are honest individuals that have found themselves upon hard times for whichever reason and need financial help. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. This makes them excellently placed to review your financial circumstances and advise you on the most appropriate form of debt relief for your situation, including bankruptcy. They are there to support you, and will make the process as simple as possible. At Spergel, unlike other bankruptcy firms, you will be assigned one of our expert Licensed Insolvency Trustees from the very start of your debt relief journey until the end. You should make sure you cooperate with your Licensed Insolvency Trustee, and be completely honest about your situation. Do not omit any information from them, and answer any questions they ask to the best of your knowledge.

While bankruptcy is a great way for many Canadians to gain a fresh financial future, bankruptcy fraud is a serious crime with grave consequences. By understanding the different forms of bankruptcy fraud, Canadians can be sure to preserve the integrity of the system. If you have any questions or concerns about filing bankruptcy, book a free consultation with Spergel. We will answer your questions and help you on the path to debt relief.

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Alan Spergel

Alan Spergel

Alan Spergel is the founder and President of Spergel. A leader in our industry, he is also a former chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and has served on Canada's Superintendent of Bankruptcy Management Board. He actively supports multiple charities, ensuring that Spergel gives back to our communities and has recently been appointed as Chairman of the Board of the Humber River Hospital Foundation. Outside of the boardroom, you can find Alan playing golf, tennis, or skiing and enjoying quality time with his grandchildren.

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