What Is Debt Restructuring Fraud?

Debt restructuring fraud is an illegal technique in which an individual or corporation hides or transfers assets before filing for bankruptcy. As a result, debt restructuring allows the fraudster to reduce or even erase the debts, and then reclaim the assets after the filing goes through. Debt restructuring fraud is a clear abuse of the intent behind bankruptcy laws and is punishable by law.

Debt restructuring is a financial method used by companies and individuals with outstanding debt to have the terms of their debt agreements modified in order to gain an advantage to aid in payback. Typically, debt restructuring is carried out by reducing interest rates on the loans and/or extending due dates for when the company’s liabilities are scheduled to be paid in order to improve the chances that the loans are paid back.

Key Takeaways

  • Debt restructuring fraud is an illegal technique in which an individual or corporation hides or transfers assets before filing for bankruptcy.
  • It is often carried out by reducing interest rates on the loans and/or extending due dates for when the company’s liabilities are scheduled to be paid in order to improve the chances that the loans are paid back.
  • By knowingly concealing or misstating assets, the debtor is abusing the process (and its creditors) to escape financial liabilities while holding onto the wealth that those liabilities helped create.
  • Debt restructuring fraud is prosecuted under 18 U.S.C. Chapter 9, which can result in a fine of $250,000 plus a prison sentence of up to five years. 

Understanding Debt Restructuring Fraud

The guiding principle of bankruptcy is for the creditors and debtors to find a compromise that works for both sides. By knowingly concealing or misstating assets, the debtor is abusing the process (and its creditors) to escape financial liabilities while holding onto the wealth that those liabilities helped create.

If it is determined that a person or group knowingly intended to defraud creditors with their asset disclosures based on existing law, then the bankruptcy court may impose civil or criminal penalties on the involved parties.

Debt restructuring fraud is typically one of four common forms of bankruptcy fraud. Other forms of bankruptcy fraud include forging legal documents or having intentionally incomplete forms, bribing court officials or others involved in the legal process, and filing for bankruptcy multiple times (or using false information to do so) to claim the benefits. According to Cornell Law School, close to 70 percent of bankruptcy fraud "involves the concealment of assets," whether that's undisclosed, transferring debt or assets to friends, or other cases of hiding it.

Debt restructuring fraud is prosecuted under 18 U.S.C. Chapter 9, which can result in a fine of $250,000 plus a prison sentence of up to five years. Even the intent to commit debt restructuring fraud or any other kind of fraud is able to be prosecuted. In the past, the United States Department of Justice has estimated that approximately every one in ten bankruptcy filings has an element of fraud associated with it.