Filing for a Chapter 11 bankruptcy can help a struggling business reorganize and continue operations. According to the U.S. Bankruptcy Court for the District of Nevada, 122 companies in the Las Vegas area filed for Chapter 11 last year. There is a strict process by which debtors must abide when seeking bankruptcy protection. Straying from those guidelines could result in charges of fraud, which can be devastating not only to the business, but also to the individual.

A business owner could commit bankruptcy fraud through doing any of the following: 

  •        Lying under oath
  •        Concealing or illegally transferring assets
  •        Giving false documentation
  •        Using a false identity to file for bankruptcy multiple times
  •        Bribing a bankruptcy trustee

If a bankruptcy trustee suspects that fraud has taken place, he or she can request a Rule 2004 Examination. Depending on the findings, the underlying debt may not be discharged or reorganized, which can leave a business in financial turmoil.

Additionally, criminal penalties may be imposed. Someone who commits fraud may also face up to $250,000 in fines. Another consequence of a fraud conviction is up to five years in jail for each instance of fraud. Therefore, if someone commits three fraudulent acts, the prison sentence could be as long as 15 years. The Internal Revenue Service reports that in fiscal year 2015, there was a 63.6 percent incarceration rate for people investigated for bankruptcy fraud. The average prison sentence was 16 months.

The best way to avoid bankruptcy fraud and the resulting penalties is to be honest throughout the proceedings.